ASIC to name and shame the Big 4… finally.

I’ve previously wrote about the need for ASIC to take a much harder stance against the Big 4 and audit…

13 Aug 19

My Audit Spot

4 mins

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I’ve previously wrote about the need for ASIC to take a much harder stance against the Big 4 and audit quality, so it was with great pleasure to read the Australian Financial Review and see that ASIC will now finally name and shame the Big 4.

So why is it important that ASIC takes this approach?

Number of ASX 200 audit clients per Big 4 firm.

According to an article in the Australian Financial Review in January 2019, the Big 4 currently audit 95% of major listed companies on the Australian Stock Exchange (ASX). This is a huge chunk of the market being contained by a small number of firms and certainly brings into question how much competition there is in the market.

As per the article (which can be read in full here): “PwC Australia currently audits 60 companies in the ASX 200, or 30 per cent of the index, giving it the largest audit share, followed by EY Oceania with 54 companies (27 per cent) and KPMG Australia with 47 companies (23.5 per cent). Deloitte Australia has only 30 audit clients in the ASX 200, or a share of 15 per cent”.

Given the number of ASX 200 companies being audited by a Big 4 firm, by ASIC ‘naming and shaming’ the Big 4, investors and companies alike are able to see how good their audits are in comparison to other providers. Whilst there is certainly a bigger issue here (i.e. are listed companies choosing their auditor based on their working relationships, or audit skills?), having this information publicly available both encourages firms to improve their audit quality, and forces companies to potentially justify why they are using an auditor which may have very poor results.

Secondly, as alluded to previously, by publicly calling out the best and worse performers of the Big 4, it really forces each firm to pull their finger out and improve the level of their audits. Whilst all bar one of the Big 4 voluntarily released their ASIC results to Accountants Daily in May this year, had there not been pressure for this to occur, there is a real chance that none of the Big 4 would have released their results.

A lot of this stems from the issues currently being experienced in the United Kingdom. Audit Quality is something close to non-existent. There is a Parliamentary committee underway, numerous reviews, and even the firms themselves have begun to restrict where they provide auditing and consulting services. All of these issues are despite the Financial Reporting Council (FRC), the UK equivalent to ASIC, already naming and shaming the Big 4 firms.

So whilst it is good that ASIC has begun to name and shame the Big 4 and their audit quality, it isn’t necessarily going to solve the underlying issue that one in five audits conducted by the six largest firms did not receive reasonable assurance that the company’s financial report was free from material misstatement.

Further proof is was recently demonstrated when KPMG released it’s ASIC report which showed issues in four of their clients, resulting in subsequent changes to those company’s financial statements. The release of this report had a negative impact on each companies share price.

Although the release of this report was good to show the current state of audit quality, the consequences were more immediately borne by the audit clients rather than the audit firm. Whilst there is no doubt the firm would have received fines and penalties, its more then likely they have still kept the client and the dent in revenue only marginally felt.

Additionally, ASIC’s methodology for review is not consistent, meaning any year on year comparisons are not possible due to the number of clients selected for the firm and the basis for their selection. ASIC needs to have a robust methodology to allow for yearly comparisons which will show truly how much a firm has improved its audit quality, or how far backwards it has gone.

So overall, whilst it is great the ASIC has begun to name and shame, the next level for ASIC is to be pragmatic in how it deals with poor audit quality. I am a firm believer that fines and penalties act as a deterrent, but do not proactively help to improve audit quality. As I have mentioned previously, a review of minimum audit resourcing requirements, minimum audit fees and mandatory training, should be enforced to bring the standard of audit up and avoid situations where Big 4 firms ‘race to the bottom’ in an attempt to provide cheap audits and win more clients; often resulting in over worked and under resourced audit teams.

I commend ASIC for now naming and shaming, but look forward to their next steps as they aim to improve audit quality and avoid any UK like situations.