Big auditors to tune up operations following ASIC fault report
In December, the Australian Securities and Investments Commission released an audit inspection report showing the quality of audits produced by large and small companies had worsened considerably since January 2011.
Of the 20 companies inspected, the report found 18 per cent of the 602 audit areas reviewed did not perform all the procedures necessary to get a "reasonable assurance" that an audited financial report was not "materially misstated".
It also found auditors were not being sceptical enough when auditing companies' books, and that they were relying too heavily on the work of other auditors.
But ASIC confirmed on Thursday that Australia's six biggest auditors - PricewaterhouseCoopers, KPMG, Ernst & Young, Deloitte Touche Tohmatsu, Grant Thornton and BDO - had agreed to prepare "action plans" to improve the quality of their audits.
The companies will focus on things such as improving the "level of professional scepticism" and the "appropriateness of audit evidence".
However, the action plans, which they will implement and monitor themselves, will not consider the issue of rotating auditors from one company to another to help maintain independence.
Analysts have warned that auditors becoming too close to companies was an industry-wide problem, and contributed to poor quality.
ASIC commissioner John Price told a parliamentary joint committee in March that mandatory rotation of audit companies "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 and Britain, he said, and any decision would have an effect on Australia's largest companies, which operate globally.
The head of audit policy at the Institute of Chartered Accountants, Liz Stamford, said ASIC recognised companies already did a lot of work trying 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.
Frequently Asked Questions about this Article…
ASIC's inspection found audit quality had worsened considerably since January 2011. Of 20 companies inspected, reviewers looked at 602 audit areas and found 18% did not perform all the procedures needed to provide "reasonable assurance" that financial reports were not materially misstated. The report also said auditors were not sufficiently sceptical and were relying too heavily on the work of other auditors.
Australia's six biggest auditors — PricewaterhouseCoopers (PwC), KPMG, Ernst & Young (EY), Deloitte Touche Tohmatsu, Grant Thornton and BDO — agreed to prepare action plans to lift the quality of their audits.
The firms said they will focus on improving the "level of professional scepticism" and the "appropriateness of audit evidence" in their audits. Their agreed approach is to prepare, implement and monitor action plans aimed at strengthening those areas.
The action plans the firms will implement do not include mandatory rotation of auditors. ASIC commissioner John Price said mandatory rotation "should be considered," but ASIC has not specifically recommended it be introduced; the issue is being discussed in Europe and Britain and could affect Australia's largest global companies.
Investors rely on audited financial reports to make informed decisions. ASIC's findings — including that some audit areas lacked required procedures and scepticism — mean there is a greater risk audited reports could be materially misstated, so investors should pay attention to audit quality when assessing company accounts.
According to the article, the firms will prepare action plans and then implement and monitor them themselves. The plans are intended to target shortcomings such as professional scepticism and audit evidence, but the firms are self-monitoring rather than being externally mandated in the article.
Yes. Liz Stamford, head of audit policy at the Institute of Chartered Accountants, said ASIC's focus on working with the firms and recognising the work they already do to improve audits is "very welcome."
ASIC inspected 20 companies and found issues across 18% of 602 audit areas reviewed, indicating problems were not isolated. The article also notes analysts warned that auditors becoming too close to companies was an industry-wide problem contributing to poor quality.
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