Samuel’s big four fix: ban firms consulting to audit clients

“It’s a financial conflict that must impact, in my view, on the quality of the audit … Audit is a very important element of corporate discipline and corporate governance, and it needs to be beyond reproach.”

‘Simple and elegant solution’

He said it would be a “very simple process” to install the ban on conflicted work.

“It’s something that the Australian parliament and ASIC [the Australian Securities and Investments Commission] can do as part of the licence conditions in respect of audit ... it’s a simple and elegant solution to the problem.”

Companies are allowed to provide certain types of non-auditing services, under certain conditions, to auditing clients under the sector’s complicated rules. This can include the auditing firm providing tax advice. This is allowed under the sector’s self-imposed rules despite global concerns that providing non-audit work to auditing clients might compromise auditor independence, and the related worries about declining audit quality.

PwC Australia has already said it would give up $10 million in annual fees by cutting the types of consulting services it provides to audit clients. Non-audit services for audit clients made up about $124 million, or 17 per cent of its audit client fees in the year ended June 30.

Auditing clients have also taken the view that allowing their auditor to provide non-audit services is an unnecessary risk. South32 chief financial officer Sandy Sibenaler told The Australian Financial Review CFO Live event last month that there was “no upside” to the company having its auditor KPMG do non-audit work. Instead, the company used one of the many other suppliers of consulting services if and when the need arose.

‘Name and shame’ on audit quality

Mr Samuel was also in favour of a robust “name-and-shame” regime around audit quality. ASIC stopped publishing an annual report card partly because of media reports focusing too much on the poor auditing work done by the big four accounting companies.

“[It] does strike me that it is fundamentally important that ASIC conducts audit surveillance and that it names and shames – that it doesn’t do so privately – and, if it’s got a problem with an audit or audit practice, that it deals with it,” he said.

The PwC tax leaks matter involved a former partner sharing confidential tax information which others at the firm used to help clients sidestep new tax laws the partner was helping Treasury design.

Mr Samuel said he did not understand “why regulators [were] timid in naming miscreants – in naming organisations, auditors, who are failing to meet the required standards. It’s all very well to talk about issues, but I also want to know which audit companies are not performing as they ought to perform.”

He also said that the states and territories could agree to allow the Commonwealth to bring “partnerships under the jurisdiction of the corporations law and thus under the jurisdiction of ASIC, and then they’d be subject to exactly the same requirements”.

Arbitrary partnership limits

Mr Samuel agreed with Greens Senator Barbara Pocock that there was no logic to the current maximum size of partnerships in Australia.

“It strikes me as somewhat arbitrary that a legal firm can have no more than 400 partners but an accountancy firm can have up to 1000,” Senator Pocock said.

Mr Samuel replied: “The logic of what we do with lawyers has always bewildered me as well … I would prefer that we have an all-embracing position where ASIC has disciplinary governance over partnerships in the same way it has governance over discipline of corporations.”

Mr Samuel also opposed the idea of forcing the companies to structurally separate into auditing and consulting outfits as “regulatory overreach” and “like cracking a nut with a sledgehammer.” The idea of structural separate has been floated by other inquiry witnesses including another former competition tsar, Allan Fels.

Mr Samuel said the difficulty with forced separation is the “Australian parliament has only got jurisdiction to deal with the Australian firm, and therefore it can’t deal with the inherent conflicts that exist with global companies or with global-associated companies.”