PwC calls audit firm rotation measure ‘interventionist’

PwC, in its submission to Treasury’s options paper on the regulation of accounting, auditing, and consulting firms in Australia, has labelled mandatory audit firm rotation as a more “interventionist” measure than mandatory tendering. However, it has recognised the goal of strengthening confidence in auditor independence and objectivity.

“Independence is already supported through partner rotation, audit committee oversight, professional standards, firm-level independence systems and regulatory inspection,” the submission said.

“The reforms we support elsewhere in this submission, including firm-level licensing, stronger governance, enhanced surveillance, targeted non-audit service restrictions and greater transparency, would further strengthen that framework.”

In its options paper, Treasury recommended requiring a reporting entity to appoint a different audit firm every 20 years.

PwC contended in its submission that mandatory firm rotation would considerably change the audit committee’s role in audit appointment and oversight. It continued that audit committees are accountable to shareholders for auditor selection decisions, while companies endure the consequences of mandatory change.

As such, it urged Treasury to consider the costs and benefits in this context and “give particular weight” to these perspectives when determining if mandatory audit firm rotation is justified.

Furthermore, the submission argued that this policy would not improve audit quality or reduce concentration in the market segments where capability constraints are most evident. It could also increase transition costs, reduce accumulated entity knowledge, and disrupt audit quality, particularly for large and complex entities, the firm said.

On the other hand, PwC supported periodically testing the audit market and mandatory regular public tendering of public service entity audit services every 10 years, in line with EU and UK companies.

It claimed that, unlike mandatory firm rotation, tendering would still allow the audit committee to reappoint the incumbent if it was deemed the best choice demonstrably after a rigorous, documented assessment.

“That distinction is important. Reform should encourage audit committees to test the market, benchmark quality and capability, and explain their judgement, without reducing their role to compliance with a statutory timetable,” the submission said.

“Accordingly, the design of any mandatory tendering requirement should preserve audit committee judgement while ensuring it is exercised transparently and with appropriate discipline. This should include a structured assessment of auditor performance, independence, capability and value for money, together with clear evidence and reasoning supporting the committee’s conclusion that its decision is in shareholders’ best interests.”

In its options paper, Treasury proposed mandatory periodic tendering for audit services, requiring all reporting entities (both existing and new) to tender for audit services publicly every decade. New reporting entities would first be required to do so upon becoming a reporting entity.

Treasury said this could allow firms beyond the big four to participate, which could engender market diversity and resilience.

When combined with the mandatory audit firm rotation option, a reporting entity would be required to go out to tender every 10 years and rotate its audit firm every 20 years.

“This is consistent with the approach in the UK and the EU, which both require mandatory audit firm rotation together with mandatory tendering,” Treasury said.

However, PwC warned in its submission that tendering should not be the only tool to tackle concentration risk in the large entity audit market.

“International experience suggests that tendering and rotation do not necessarily shift the most complex audits away from the largest firms, and Australia’s largest audit clients often operate in concentrated industries where the viable audit provider set is limited,” the submission read.

PwC was at the centre of a tax leak scandal in 2014 and 2015, when former PwC partner Peter-John Collins used his position on federal Treasury advisory committees to access confidential government tax reform plans. He used this information to develop tax avoidance strategies for major multinational companies before the laws became public, and earned the firm at least $2.5 million in revenue as a result.

The scandal led the government to release draft legislation to strengthen the TPB's regulatory and sanctioning powers and amend the Tax Agents Services Act 2009 to introduce stronger penalties to deter inappropriate behaviour by registered tax practitioners and unregistered preparers.