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The Big Four auditing firms, Deloitte, EY, KPMG and PwC, have come under the scrutiny of multiple inquiries in Australia by the senior department of the parliament and by the Australian Securities and Investments Commission (ASIC) that are looking into the work that the firms do for the federal government as well as their quality of audits of the listed companies.
The inquiries, which have startled the market participants, are examining the efficiency and effectiveness of the ongoing audit practices in detecting fraud and misconduct, the relationship between the auditing and consulting arms of the big four as well as the degree of competition in the audit market.
The authorities at ASIC have concluded and warned that the quality of auditing in Australia was deplorable, needed urgent addressal and could lead to the next Enron-style corporate collapse. For regulators across the world, the quality of auditing has been a matter of concern for many years and they believe that auditors are not curious enough to challenge the evidences in place and then form an audit opinion. As a result, there is a scarcity of competition in the audit industry.
Also, the Commission added that, since the consulting divisions at the Big Four firms generate the maximum revenue, the employees who join the audit department were always looking to shift to the consulting department where growth prospects were higher with higher revenues and business.
The corporate regulator, ASIC, has begun to disclose the individual firm results of its ongoing audit inspection, while its next reports would come out at the end of the year 2019. The Commission has informed that it would also increase the frequency of its audit inspection reports and generate yearly publications rather than every 18 months (previously), as well as incorporate a broader range of measures of audit quality. The next public audit inspection report for the 12 months to 30 June 2019 is scheduled to be disclosed in December 2019 and would have separate findings for each of the Big Four firms.
Although, the Australian Securities and Investments Commission acknowledges the efforts being put in by the auditors to improve the quality of their corporate audits, there is a large scope of improvement for the firms to assess their work and come up with new initiatives.
The four firms have welcomed, although cautiously, the ongoing enquiries while looking forward to incorporating the constructive feedback that these inquiries would be generating.
The ongoing inquiries are also looking into the outsourcing of contractors and consultants by the federal government while a stand-alone Senate committee is examining EY?s employment of former defence minister Christopher Pyne, reflecting violation of the ministerial code of conduct.
Not only in Australia, but across the world, the auditors have been facing probes by the accountancy watchdogs over possible breaches. Back in 2015, the Financial Reporting Council (FRC) in the UK and Ireland had hit KPMG with a fine of hundreds of thousands of pounds for placing commercial interests ahead of ethical standards and breached conflict-of-interest rules concerning two separate clients.
Lately KPMG has yet again come into limelight for its misconduct into the work done for one of the world?s largest custodian bank, BNY Mellon based in New York, United States. The breaches identified by the regulators were truly exceptional, adding a lot of scepticism and questioning of credibility regarding the audit services of the Big Four firms. A fine of around GBP 5 million has been placed on KPMG for the same.
The Competition and Markets Authority, a UK regulator, proposed some significant reforms to the country?s auditing industry in April 2019, under which it recommended the Big Four audit firms to separate their audit and consulting arms.
Recently, in South Asia, the Indian government has also insisted on the Competition Commission of India (CCI) to carry out an assessment/survey to understand if the Big Four auditing firms and their affiliates are impeding fair competition in the Indian audit market.
Back in 2018, all the India-base units of PwC were prohibited from auditing any listed companies for two years after probe into a decade-old accounting fraud.
Auditors play a critical role in establishing trust in capital markets and safeguarding the interest and money of the stakeholders involved, and it?s only legit that the governments need to ensure that they are doing their jobs correctly and in a fair manner.
An auditor needs to make sure that the information reported on financial statements is true and accurate and that the financial statements have been prepared according to the financial reporting framework, GAAP (Generally Accepted Accounting Principles) or IFRS. Upon their assessment of the same, they form an independent ?opinion of the company?s financial records, which can make or break the reliability of the financial statement information.
Some of the most critical auditing procedures include the investigation of management and related personnel to obtain an understanding of the working of the business, its operations, financial reporting style, and any known fraud/error. Other subsequent steps include assessment of and understanding the internal control system and executing analytical procedures on expected or unexpected variances in account balances or classes of transactions. The auditor also tests documentation supporting account balances or classes of transactions while assessing the physical inventory count. Lastly, the account receivables and other accounts are confirmed with a third party.
There are high expectations of stakeholders and corporate and government regulators from the auditors that regularly initiate inquiries to push them to stay committed to high-quality, independent work and comply with all ethical and professional standards.
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