Audit reviewers need scrutiny
Whacking accounting bodies appears to be the current fad as the audit regulation inquiry being run by the Parliamentary Joint Committee on Corporations and Financial Services moves gradually closer to quizzing the Big Four accounting firms.
The upcoming hearing will probe audit quality, auditor independence and appropriate audit regulation.
Chartered Accountants - Australia and New Zealand has come in for criticism for not conducting reviews of audit working papers of firms that are members.
It should be acknowledged that the larger firms are a direct source for CAANZ membership. Big Four firms are represented on the board of CAANZ. Representatives of those firms will populate various committees of CAANZ at one time or another.
The body is a sitting duck for criticisms centring on conflicts of interest and being captured by the membership as is any organisation that has members and also people within governance ranks that are drawn from large employers in an area of specialisation.
What analysis from some players in the political tango currently under way via the committee fails to point out is that there are plausible practical and policy reasons for CAANZ to not conduct in depth reviews of audit working papers from Big Four firms and other practices.
The corporate regulator, the Australian Securities and Investments Commission, already conducts reviews of audit working papers and it publishes the review findings in audit firm inspection reports that are written up in audit speak.
ASIC has found multiple instances in which it alleges there are breaches of auditing standards, which are effectively allegations that accounting firms at the top end of Australia's business sector have broken the law.
The regulator uses its own methodology and reports publicly on some of the detail. It will publish the names of the firms and their individual 'scores', which ought to impress nobody because the lowest score simply means the regulator has found fewer instances in which it can allege failure to comply with the Corporations Act.
ASIC has found multiple examples of breaches since it began inspecting audit firm working papers over more than a decade. One has every reason to wonder why the statutory disciplinary board has dealt with 13 auditors in just over a decade given the repeated bleating from the regulator about a decline in audit quality.
The CAANZ position is entirely understandable when it is subject to more serious analysis because the corporate regulator is the entity with the capacity to take real action within a statutory regime. The professional body has few sanctions available to it with the most extreme being booting an errant auditor out of the membership.
Accounting bodies have a limited remit and as such their impact will not be felt more broadly than within circles of the profession.
There is, however, another far more interesting reason for CAANZ to not entertain a deep dive into the audit working papers of the clients of the Big Four and other large firms.
Imagine what would happen if ASIC and CAANZ conducted reviews of audit working papers and came to a different answer on audit quality.
The debate would centre around whether the CAANZ process was more reliable because it had a different methodology to that of the corporate regulator. Any sensible policy maker will understand that the only way you could get parity between the processes of the corporate regulator and an accounting body is for both organisations to look at the same sets of files from the relevant firms and see whether the resulting answer of the reviews was the same.
Separate reviews of audit quality would be a waste of time otherwise because the results would inevitably be based on a different data set. How on earth can the average person on the street look at the findings from two processes and make any sense out of them?
There would also be discussions about whether CAANZ's results could be trusted because a large number of members come to CAANZ through the larger firms. Sceptics would look at a report that is critical of firms and wonder whether the accounting body would be harsher in its language if there was not such a 'conflict of interest'.
The reality is neither set of results could be fully trusted because inspections of both sets would depend on the understanding of professional judgement of practitioners undertaking the audits being reviewed.
Another matter is also worth noting.
Neither ASIC nor CAANZ is a court of law. A definitive ruling on whether entities have complied with the auditing standards that are law in Australia can only really come through a judicial or disciplinary process.
It is all very well for breaches of law to be alleged. When will we see a court case mounted arising from audit inspection reviews that causes Big Four firms serious heartburn?