Auditors promise to improve after ASIC warning
In December, the Australian Securities and Investments Commission released an inspection report showing the quality of audits produced by large and small firms had worsened considerably since January 2011.
Of the 20 firms inspected, the report found 18 per cent of the 602 audit areas reviewed did not perform all the procedures necessary for a "reasonable assurance" that an audited financial report was not "materially mis-stated".
It also found auditors were not being sceptical enough when looking at companies' books and were relying too heavily on the work of other auditors.
ASIC confirmed on Thursday that Australia's six biggest auditors - PwC, KPMG, Ernst & Young, Deloitte Touche Tohmatsu, Grant Thornton and BDO - had agreed to prepare "action plans" to improve the quality of their audits.
The firms will focus on areas such as the "level of professional scepticism" and "appropriateness of audit evidence".
However, the action plans - which the firms will implement and monitor themselves - will not consider the issue of rotating auditors to help maintain independence.
Analysts have warned that audit firms getting too close to companies is an industry-wide problem.
ASIC commissioner John Price told a parliamentary joint committee in March that mandatory rotation "should be considered".
"[But] I do not think ASIC has specifically said we think mandatory auditor rotation should be introduced," Mr Price said.
The issue was being discussed in Europe, he said, and any decision would have consequences for Australia's largest firms, which operate in a global environment.
"We need to be very mindful of what is happening in overseas jurisdictions ... that could clearly cause problems for the Australian market if a number of jurisdictions were to go one way and Australia was doing things another way."
Liz Stamford, head of audit policy at the Institute of Chartered Accountants, said ASIC recognised firms already worked hard to improve their audits.
"The fact that the focus of ASIC [is] on working with the firms and recognising that the firms do a lot of work in this space ... is very welcome," she said.
The firms will implement key aspects of the plans for audits for the year ending June 30.
ASIC will review each firm's initial progress in January and February 2014.
Frequently Asked Questions about this Article…
ASIC issued a 'final warning' after an inspection report found audit quality had worsened considerably since January 2011. Of 602 audit areas reviewed across 20 firms, 18% did not perform all procedures necessary to give reasonable assurance that a financial report was not materially misstated.
Australia's six biggest auditors — PwC, KPMG, Ernst & Young, Deloitte Touche Tohmatsu, Grant Thornton and BDO — agreed to prepare action plans to lift the quality of their audits.
The firms said their action plans will focus on areas such as increasing the level of professional scepticism and improving the appropriateness of audit evidence. They will implement and monitor the plans themselves and start key aspects for audits for the year ending June 30.
The firms' action plans will not consider mandatory rotation. ASIC commissioner John Price said mandatory rotation 'should be considered' and noted the issue is being discussed in Europe, but ASIC has not specifically said it will introduce mandatory auditor rotation.
ASIC found auditors were not always sufficiently sceptical of company records and were relying too heavily on the work of other auditors. Across the inspections, 18% of the 602 audit areas reviewed did not perform all necessary procedures to provide reasonable assurance against material misstatement.
ASIC will review each firm's initial progress on their action plans in January and February 2014 to assess whether the firms are making improvements.
Analysts warned that audit firms getting too close to companies is an industry‑wide problem that can threaten independence. ASIC has discussed mandatory rotation as a possible option, and the Institute of Chartered Accountants' audit policy head, Liz Stamford, welcomed ASIC's collaborative approach with firms to improve audits.
The ASIC report indicates some audited financial reports may have weaknesses because certain audit procedures were not always completed and scepticism was sometimes lacking. While the major firms have committed to action plans and ASIC will monitor progress, investors should be aware that audit quality has been under scrutiny and factor that into how they assess company financial statements.
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