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Nassim covers the accounting and tax rounds for BRW, as well as general business news. She previously worked for The Age newspaper covering general news, state politics and economics.

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Revolving door for auditors may not lift quality, says standards board

Published 11 March 2013 10:11, Updated 11 March 2013 13:10

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Revolving door for auditors may not lift quality, says standards board

Part-time chairman of the Auditing and Assurance Standards Board Merran Kelsall says that while rotating auditors is an idea worth examining, changing them too frequently would be an expensive exercise that wouldn’t necessarily lift quality. Photo: Jessica Shapiro

The body that sets standards for Australia’s accounting industry, the Auditing and Assurance Standards Board, is considering tweaking rules that force companies to change auditors more regularly.

A recent UK Competition Commission investigation into the relationship between auditors and their clients suggested companies rotate their audit firms more frequently to ensure that auditors are working in the interests of shareholders.

In its preliminary findings released last month, the commission suggested mandatory tenders, currently set at 10 years in UK by the Financial Reporting Council, could be made more frequent at either five or seven-year intervals.

It wants to ensure that the big four auditors (PwC, Ernst & Young, KMPG and Deloitte), which check the books of about 90 per cent of UK listed companies, are kept in line.

Its investigation into the UK market found such dominance undermines shareholder value and needs, and the end result is “higher prices, lower quality and less innovation” by companies.

Merit in rotation

The part-time chairman of the Auditing and Assurance Standards Board, Merran Kelsall, says Australia is closely watching what’s happening overseas. She says there may be “merit” in considering more regular rotations and compulsory tendering so audit firms have to go to market and justify their auditor.

“Getting a fresh set of eyes” looking at a company’s books may be a good idea, she told BRW. “Australia as a capital market needs to be very alert as to what’s going on in other jurisdictions.”

Kelsall says the question of how many years is up for debate, with some people in Australia previously suggesting four-year rotations instead of seven.

“The timing is quite important,” Kelsall says. “Every four years the auditors would just get to know the company and then would have to move on. That’s an expensive exercise for companies and firms and arguably may not result in high-quality audits.”

Big four firms control almost 90 per cent of the listed company market in Australia, earning them around $518 million in fees, according to a recent study into the ASX-listed audit market by CPA Australia and the Accounting & Finance Association of Australia and New Zealand.

But Kelsall, a former BDO accountant, says despite the big four’s market concentration, the Australian audit market is highly competitive. “I think we need to be wary of excessive competition and low-balling audit fees endangering audit quality,” she says.

Political games

CPA Australia’s audit and assurance policy adviser Amir Ghandar says much of the extra scrutiny by regulators, and the UK Commission’s proposals for mandatory rotations and tendering are not based on clear evidence, but political imperatives.

“This is based on regulators and lawmakers wanting to be seen to be doing something,” he says. “We need to have a debate, but we also need an objective evaluation of facts rather than just opinions.”

The big four are also firmly against mandatory rotations. Deloitte’s national leader assurance and advisory, Cindy Hook, says while they are supportive of improving audit quality, it should be up to the company to decide when it wants to change auditors.

The big four have already come under close scrutiny by the Australian Securities and Investments Commission. Chairman Greg Medcraft has repeatedly stressed the important gatekeeper role auditors play in ensuring confidence in financial markets.

Declining quality

In December ASIC released an audit inspection report that showed audit quality had declined. The report for the 18 months to June 30, 2012, covered inspections of 20 Australian audit firms and found 18 per cent of the 602 audit areas reviewed did not perform all of the procedures necessary to obtain reasonable assurance that the audited financial report was not materially misstated.

Medcraft has called on big four audit firms to “increase their efforts to improve audit quality and the consistency of audit execution”. He wants them to report to ASIC by the end of the month with options for improving audit quality.

Hook says the current audit system in Australia is working, and if there’s going to be regulatory changes, there needs to be a definition of what a higher quality audit is.

The Institute of Chartered Accountants head of audit policy, Liz Stamford, says many of the issues raised by the UK Commission were already addressed as part of a review by Treasury back in 2010.

Following that review, the federal government released laws last year aimed at improving the quality and transparency of audits. “In Australia we have a solid framework around our corporate governance,” Stamford says. “The issues they are trying to address are already covered.”

Splitting audit and advisory

Policymakers in Europe have even gone so far as suggesting accounting firms be split into separate audit and advisory firms. But Kelsall doesn’t believe that will happen. “It’s probably unlikely we will see a split,” she says.

“We need to maintain accomplished auditors who understand the business and have as broad-based skills and experience as possible,” she says.

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