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Navigating the Tightrope of Auditor Independence: A Closer Look

In the labyrinth of financial reporting and corporate governance, auditor independence stands as a beacon of trust and integrity. However, recent controversies around independence have thrust the delicate balance of auditing and consulting services into the spotlight, raising critical questions about the integrity of financial audits.

Both Australian and international regulatory bodies have been looking closely at audit independence in recent years. In 2020, the UK’s Financial Reporting Council placed the ‘big 4’ on notice that their auditing and consulting practices needed to transition to separate business units by 2024.

With the exception of EY’s failed attempt to separate their consulting and audit arms, there has been no real progress on this front. With business at the top end going so well, there is no imperative to disrupt current structures. This is reflected by feedback from the Global Head of Deloitte, Joe Ucuzoglu, who described any proposed split as ‘a solution in search of a problem.’  

The recent PwC case in Australia involving use of confidential updates on government Multinational Anti-Avoidance tax plans to develop client relationships and generate fees has had considerable implications for consulting business in Australia. In this case, the government services division of PwC was hived off to form a new company Scyne Advisory, with support from private equiry firm Allegro Funds. Scyne stated that ‘we need to eliminate the inherent conflicts of interest serving both the public and private sector.’

More recently, the 2023 Australian Joint Parliamentary Inquiry into the ‘management and assurance of integrity by consulting services has been examining how to bring more accountability to the sector, including review of the ‘archaic’ partnership structure of the major accounting firms. The final report of this inquiry is scheduled to be provided in March 2024.

Former ACCC Chairman Graeme Samuel told the inquiry it was undeniable that, if a company was performing both consulting and audit work, they had a conflict of interest that cannot possibly be avoided’. He went on to suggest that it would be ‘a very simple process’to establish a ban on conflicted work.  

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.”

Despite all the talk, we seem no closer to a solution. Why is there so much resistance to separation of audit and business services within the sector?

The regulatory landscape, designed to safeguard auditor independence, encompasses rules limiting certain non-audit services. Yet, critics argue these measures fall short, pointing to loopholes and inadequacies that allow for a blurring of lines between auditing and consulting practices.

The economic ties between auditors and their clients further muddy the waters. The burgeoning fees from consulting services can overshadow audit fees, fostering a dependency that may pressure auditors to bend the rules to retain lucrative contracts. This fee dependency underscores a pressing need for a re-evaluation of financial relationships that could influence audit impartiality.

Firms tout various internal measures to protect auditor independence, from “Chinese walls” to rigorous independence checks. However, the effectiveness of these policies is often questioned, highlighting a gap between policy and practice. Real change requires more than just formalities; it demands a commitment to a culture that places independence at the forefront of professional values.

Mr Samuel stated that ‘the difficulty with forced separation of audit and consulting  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.”

That’s true where firms are multinational, however that still leaves significant external audit work being conducted by federated mid-tier and smaller accounting firms based in Australia. In many cases, these firms are separating audit from other services proactively. Dedicated audit firms such as National Audits Group are taking on what is increasingly the specialist service of external audit.

Looking Ahead: The Future of Auditor Independence

The challenge of maintaining auditor independence is not confined to any single jurisdiction. Around the world, regulatory bodies grapple with these issues, crafting a patchwork of standards and regulations. The global nature of today’s corporations adds layers of complexity, as firms navigate varying standards across borders.

Beyond regulations and internal policies, the bedrock of auditor independence lies in professional ethics. Upholding ethical standards demands a shift in corporate culture, recognizing the paramount importance of independence not merely as a regulatory requirement but as a fundamental professional principle.

In the wake of scandals and public scrutiny, the accounting, auditing and consulting industry stands at a crossroads. The choices made today will shape the future of auditor independence, determining whether it remains a cornerstone of corporate governance or becomes a relic of an unheeded past.

National Audits Group firmly believes that audit specialisation is the only way to effectively achieve both independence and quality of external audits.  

To discuss these issues further, contact us directly on 1300 734 707 or email [email protected]

Nicholas Kannan | Audit Manager, National Audits Group

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