The Parliamentary Joint Committee on Corporations and Financial Services report Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry features the following recommendations
1 The committee recommends that the Australian Government not permit PwC or any of its related entities to tender for government work until the completion of all ongoing investigations including but not limited to those by the Tax Practitioners Board, Australian Federal Police and Australian Taxation Office. Prior to PwC being eligible to tender for government work, PwC must demonstrate it has taken all appropriate remedial action in response to the outcomes of the investigations.
2 The committee recommends that the Australian Government implement the recommendation of the Senate Finance and Public Administration Committee that the government commission an appropriate body to review and make recommendations on the long-term goal of regulation of large partnerships, including in relation to: the appropriate regulator and its powers, applicable governance principles, transparent reporting obligations, penalties for breach, and a roadmap for implementation given the complexities of overlapping jurisdictions.
3 The committee recommends that the Australian Government reduce the allowable size of partnerships for accountants to a maximum of 400 partners, to align with the limits of legal partnerships. The government should establish a suitable transition period of up to 5 years for this change to enable the implementation of this recommendation whilst minimising disruption to the sector. A review of progress to this end should be conducted after 2 years, if at that time the entity has not chosen to incorporate.
4 The committee recommends that the Australian Government consider increased accountability and response mechanisms, including a suitable penalty regime calibrated to the seriousness of the misconduct, for partnerships who have engaged in misconduct.
5 The committee recommends that the audit, accounting, and consulting partnerships of firms with greater than 3000 staff be required to implement the Corporations Act 2001 requirements for governance and accountability, if appropriate through the adoption of the Australian Securities Exchange Corporate Governance principles. This should include the requirement for multidisciplinary partnerships to prepare their own general purpose financial reports, including remuneration disclosures and other obligations which may be applicable to partnerships. The government should review the operation of this measure within 3 years, with a view to extending its scope to mid-size partnerships.
6 The committee recommends that the Australian Government enhance the transparency of large professional service firms by designating them as Public Interest Entities and requiring them to: subject them to audit if they are not already subject to these requirements, which would be filed with ASIC and be available for public inspection; and potentially be required to implement the Global Reporting Initiative Standards or the Public Interest Firm Code.
7 The committee recommends that the Australian Government ensure that the financial statements disclosure requirements cover all relevant fees (that may raise a conflict of interests) paid to the entity’s auditor for audit and non-audit services. This should cover any single entity and their associated entities in Australia or overseas.
8 The committee recommends that multi-disciplinary large accounting firms (and their associated entities both in Australia and internationally) should not be permitted to supply both audit and non-audit/consultancy services to the same client (and their associated entities both in Australia and internationally).
9 The committee recommends that multi-disciplinary large accounting firms (including those required to lodge annual transparency reports under section 332A of the Corporations Act 2001) should be required to implement operational separation of their audit practice from their non-audit practice. The principles of operational separation should be materially consistent with those applying in the United Kingdom or other global best practice.
10 The committee recommends that the Australian Government legislate to give further powers to the Australian Securities and Investments Commission to oversee audit to cover all partners within multidisciplinary firms regardless of which part of the firm they work in, as required in the UK Financial Reporting Council Audit Firm Governance Code.
11 The committee recommends that the Australian Securities and Investments Commission: re-establish a program of random audit inspections; supplement its existing risk-based approach by also reviewing audit files where conflicts of interest arise from the Big Four firms providing other services to their audit clients (noting that such conflicts should not occur from the time of implementation of operational separation); and increase the level of resources that it devotes to financial report inspections and audit inspections until there is a significant improvement in audit quality.
12 The committee recommends that the Australian Government implement a legislative requirement that the Australian Securities and Investments Commission publish all individual audit firm inspection reports.
13 The committee recommends that the Australian Government implement the Financial Reporting Council recommendations to the Minister to pursue legislative change on disclosure of auditor tenure and audit fees in directors’ reports and going concern assessments in directors’ declarations.
14 The committee recommends that the Corporations Act 2001 be amended to expand the auditor’s independence declaration to require the auditor to specifically confirm that no prohibited non-audit services have been provided.
15 The committee recommends that the Corporations Act 2001 be amended to implement a mandatory tendering regime such that Public Interest Entities (including listed companies and the large multidisciplinary partnerships, such as the Big Four) required to have their financial reports audited under the Act must undertake a public tender process every ten years.
16 The committee recommends that the Corporations Act 2001 be amended (following consultation with relevant stakeholders) such that entities required to have their financial reports audited must establish and maintain an internal controls framework for financial reporting, including requirements that: management evaluate and annually report on the effectiveness of the entity’s internal control framework; and the external auditor report on management’s assessment of the entity's internal control framework.
17 The committee recommends that the Australian Government: consider mandating digital financial reporting for listed companies and other public interest entities in Australia; and following such implementation and evaluation: consider options for resolving barriers to implementing digital financial reporting for privately owned companies, not-for-profits and charities in Australia.
18 The committee recommends that the Australian Government legislate to enhance the Australian Security and Investments Commission’s power to take enforcement action against audit firms, not just individuals, including for quality management standards.
19 The committee recommends that the Australian Government consider requiring audit firms, or the audit section of multidisciplinary firms, to incorporate.
20 The committee recommends that: the Australian Government adopt a phased approach and proceed with its proposal to integrate the accounting and audit standards boards with the Financial Reporting Council; and the Australian Government then establish an organisation in Australia equivalent to the United States Public Company Accounting Oversight Board.
21 The committee recommends that the Australian Government reform the Companies Auditors Disciplinary Board (CADB) to improve its efficiency and effectiveness by: implementing improved, more stable and transparent arrangements for staffing and resourcing auditor disciplinary functions; providing more clarity around what cases trigger referral to CADB; removing the Australian Security and Investments Commission’s (ASIC’s) discretion over whether auditors can avoid a disciplinary process by resigning; compelling the findings of ASIC audit surveillance reports to be automatically referred to CADB; and giving CADB the power to make own-motion investigations, in addition to receiving referrals from ASIC or the Australian Prudential Regulation Authority.
22 The committee recommends that the Australian Government consider additional mechanisms to ensure the Financial Reporting Council and any related standards boards, the Companies Auditors Disciplinary Board, the Australian Securities and Investments Commission, the Tax Practitioners Board, and the Australian Taxation Office and other government regulatory bodies are independent and are seen to be independent, including by ensuring that the bodies do not include individuals with a current financial interest in entities under the direct governance of the body. This may include revision of internal governance structures, independent review or audit of decision making and internal governance structures by an external third party, such as a government department or parliamentary committee or appropriate expert to ensure that the revolving door between the public and private sectors does not lead to perceived or actual conflicts of interest.
23 The committee recommends that the Australian Government ensure that the new Financial Reporting Council has structural, governance and administrative arrangements which are independent from Treasury, including by ensuring that the new Financial Reporting Council do not include individuals with a current financial interest in entities under the direct governance of the body.
24 The committee recommends that the Australian Government enhance and harmonise codes of conduct and requirements for disclosure of conflicts of interest for all bodies established under the Australian Securities and Investments Commission Act 2001, including the new Financial Reporting Council.
25 The committee recommends that the professional accounting bodies’ reports to the Professional Standards Councils are published on the professional accounting bodies’ websites.
26 The committee recommends that the Australian Government review the professional accounting bodies’ investigatory and disciplinary processes and, if appropriate, establish a single, independent body to perform these functions. Such a body should incorporate a positive disclosure standard so that relevant entities would be required to disclose incidents that are flagged to the Australian Securities and Investments Commission and the new integrated Financial Reporting Council.
27 The committee recommends that the Australian Government bring forward legislation to make the term ‘accountant’ a protected term, so that only qualified accountants who are members of a professional body can use it.
28 The committee recommends that the Australian Government, as part of establishing the new integrated Financial Reporting Council (FRC), consider how ethical standards and professional matters are to be treated (including the FRC’s role in creating standards, and the role of the Accounting Professional and Ethics Standards Board). Appropriate measures should be adopted to address the conflict of interest inherent in professional bodies setting and enforcing their own standards whilst overseeing entities who are their own fee-paying members.
29 The committee recommends that the Australian Government consult with industry with a view to creating a consultancy code and associated consultancy code compliance body (with sufficient powers to ensure compliance with the code) within government that will register individual consultants and have graduated registration requirements for firms based on firm size. Government entities, including Corporate Commonwealth Entities, should be required to only engage consultancies who are members of this body. At a minimum the body should apply to persons providing consultancy services not subject to other mandatory obligations and membership requirements should include mandatory reporting of misconduct witnessed by other consultants. This should be reviewed three years after implementation.
30 The committee recommends that the Australian Government consider the creation of a voluntary industry code for public interest entities’ engagement of consultancies, which includes the exclusive use of consultants subject to the code and/or registration body determined in recommendation 29. After three years, the government should review the capacity and effectiveness of the code becoming mandatory for public interest entities.
31 The committee recommends that consulting firms undertaking government work be required to make a declaration if subject to supervised remediation whilst undertaking government work, and the exact terms of such supervised remediation. Upon tendering for government work, consulting firms should also be required to provide specific information regarding the engagement of the firm with global leadership, including but not limited to the provision of information regarding what oversight, if any, exists with respect to that firm’s engagement with Australian regulatory and legal bodies.
32 The committee recommends that the Australian Government explore options to enhance accountability for consultants, potentially including the establishment of a public register (maintained by the relevant registration body) to record for public view all instances of malpractice.
33 The committee recommends that the Australian Government and professional bodies develop mechanisms to enhance the transfer of misconduct information between regulators and all relevant professional bodies.
34 The committee recommends that the Department of Finance consider further mechanisms to increase usage of small and medium-sized consulting firms in government procurement, including firms which exclusively undertake government work.
35 The Committee recommends that the Australia Government consider options to improve the Australian Taxation Office’s tax settlement procedures with a view to making their details more transparent to all taxpayers and setting out appropriate procedures and protocols for their use, negotiation and terms.
36 The committee recommends that the Australian Government take action to ensure greater alignment of whistleblower protection laws across the public and private sectors.
37 The committee recommends that whistleblowing protections be applied to large audit, accounting and consulting firms.
38 The committee recommends that the Australian Government consider options for greater practical support of whistleblowers such as a Whistleblower Protection Authority (covering both the public and private sectors), including access to civil remedies and financial compensation particularly in instances where disclosures result in the imposition of a penalty on the relevant entity or organisation.
39 The committee recommends that the Australian Government continue to monitor and review legal frameworks and regulations that have been implemented to protect workers from harmful internal cultures and unsafe working environments in the form of bullying, sexual harassment and exploitation.
40 The committee recommends that the Australian Government consider mechanisms to increase competition within the audit sector. This may include mandating tendering, mandating firm rotation for auditors, and mandating public interest entities be subject to joint audits which include smaller firms.
