What Treasury’s firm regulations options paper got right

Speaking to Accounting Times, UNSW professor Gary Monroe said the options paper provided good ideas to address audit quality.

While Monroe said the options paper would not mean the profession would become audit-scandal-free, he said many suggestions in the paper were “good ideas” that would improve overall audit quality.

Despite the criticism that the options paper needs greater targeting, Monroe agreed with its treatment, which holds that firms need to comply with ethical requirements to reduce the chance of rationalising their unethical behaviour as a “good thing”.

However, he noted that auditors still need to internalise these ethical requirements, rather than merely comply with them externally, which requires a “tone at the top”.

“To internalise [ethical requirements, auditors] need to see how other people are behaving around the organisation. It's a lot of what we call ‘tone at the top’.

“[Through] ‘tone at the top’, senior executives really need to be communicating the ethical standard that is expected of staff, and that if you don't adhere to that ethical standard, there are serious consequences,” he said.

In addition, Monroe thought that option 2B of the paper – "Achieve operational separation within existing structures" – was positive.

“That seems like a really good idea that will perhaps keep the audit function a bit more independent from the other functions in a multidisciplinary audit firm or accounting firm in the way things are conducted.”

Further, in light of the paper’s option 3B – Reduce the partnership limit for accounting firms and require a percentage of partners to be registered to deliver regulated services – Monroe said a better alternative to reducing the partnership limit would be requiring partners to become a company subject to ASIC and corporate law requirements.

“Being held accountable against the company accounting standards [is] going to be a good thing [to improve] accountability. Compared to the partnership structure, which has very limited opportunities to hold the auditors accountable.”

Finally, Monroe said that option 4 of the paper – "Mandate the frequency of audit reviews, increase the level of surveillance, and publish findings" – would be instrumental for the auditing market.

“[Through this option] the market [can] better understand who is a high-quality versus a low-quality auditor. When you find bad things out and don't reveal them, the markets are uninformed.

“I think when they originally published the names of the audit firms that they had adverse findings against, that was a very good thing, because it caused audit committees to then question the quality of the auditor.”

Accounting bodies recognised the careful consideration needed for reform, urging that the Treasury take deliberative, not reactive, steps towards repairing damaged trust.