Let's get real - holistic governance review needed

Anyone that has been alive long enough and worked within or observed the accounting world will tell you that the accounting profession is good at promoting recycling. In particular, the recycling of debates on matters of professional standards and auditor independence has been turned into a fine art.

The profession itself engages in introspection on these matters from time to time but on other occasions external factors cause politicians, regulators, bureaucrats, shareholder activists, vociferous academics and professionals who consider themselves to have had a 'road to Damascus' conversion to kick that tyre again for another look.

It is really not surprise therefore that the Parliamentary Joint Committee on Corporations and Financial Services is looking at the area that many folks with a half decent corporate memory have thought about and reflected over for some time.

This path has been trodden over by many politicians and over the past three months and there has been a fascination amongst journalists about what the accounting firms and other witnesses say in defence of the accounting world.

This writer has heard every possible argument one way or another over the space of 25 years and read historical material about issues related to audit regulation. Some home truths need to be examined more closely here.

One of the first problems with the current discussion is that there is a disproportionate focus on banks and financial services rather than looking at how audit fits in with the broader range of entities in the community.

Journalists have created a buzz around the banking sector and the way banks interact with external advisers. Accounting firms are in the mix and the relationship between the NAB and its external auditor, EY, has been in the spotlight. It has been used by some members of the committee as an excuse to go and kick the tyres of the banks and the audit firms in order to fill a gap some believe was left by the Hayne Royal Commission.

Hayne's royal commission was not 'one with the lot' to use a fast food analogy. It was only ever meant to cover specific areas within a short time frame for each topic that the government asked them to consider.

Should more time have been spent on superannuation? Certainly. Would the area of regional banking and servicing remote communities be something that merited more attention? Of course.

Hand wringing over the terms of reference will fix bugger all. That terms of reference is a reflection of the orgy of self-interest that led to the calling of the royal commission in the first place.

The Hayne 'gaps' is an interesting rationale for running an inquiry into audit regulation but such an inquiry, quite frankly, could be run on its own merits without reference to Hayne or banking misconduct.

The current inquiry into audit regulation was in part inspired by the collapse of Carillon in the United Kingdom, which belly flopped into non-existence. It used the Big Four accounting firms' services of varying kinds and got services from all of them, which stimulated a bit of a deep dive and a raft of reviews. They have poured an enormous amount of energy into getting people reviewing the accounting profession and auditors that operate from within it.

One report after another recommended reform of the system in the United Kingdom. There is not much point in Australia looking at much of that material because Australia's regulatory environment is not the same as that of the United Kingdom.

The Brydon Report, for example, is one that Australian parliamentarians and other people keen to flip open the hood on the accounting world to tinker with the engine should ignore because we already do the structural stuff contained in there in many respects.

We do not need a 'corporate auditing' profession in Australia because auditing is already regulated in this country. Auditors are registered with the regulator. Auditing standards are legally backed. Ethical standards are also legally backed via incorporation into auditing standards.

Then there is the persistent whinge about audit quality declining, with the evidence being a limited set of working paper reviews that ASIC itself admits cannot be extrapolated to explain the audit quality across the entire profession.

These reports are covered by journalists and referred to by people as being an authoritative picture on audit quality in this country. To have audit inspection reports that cannot be properly used as a statistical representation of audit quality being cited as authoritative simply because they are issued by the domestic regulator is a questionable practice.

Too few sets of working papers are looked at by the regulator for this to be taken seriously as a statistical exercise. It has the potential to smear audit partners and staff who were not involved in the audits deemed by ASIC to be inadequate.  No reasonable person could regard this as appropriate state of affairs.

The Commission also has a track record of whining about audit quality but not acting on what is a breach of the Corporations Act. It is now threatening to take auditors to court if it is able to gather sufficient evidence to meet the respective burdens of proof.

The watchdog will be respected more by people about the place when it learns to place the value in a decent bite rather than merely having a loud bark.

While the three influences that led to the review being undertaken each have their own problems there are measures the committee can recommend to improve the system we currently have in place in its final report.

The first is for senators to drop the notion of extending the current inquiry, which has been spoken about in the media and also by some senators. Recommend a periodic examination of the conduct of statutory audits, given that these are services that are a legal obligation.

The current inquiry is reactive because the Federal Parliament itself has been negligent and failed to do more frequent reviews. Periodic reviews of the way in which registered auditors comply with provisions of the Corporations Act 2001 will keep people on their toes.

Professional bodies such as the accounting bodies have recognition in various laws. The accounting bodies should be brought before a parliamentary committee in a separate set of hearings to persuade the parliamentarians they remain fit and proper to maintain recognition.

Which bodies should form a preliminary list for quizzing by a parliamentary committee? Try the list of bodies recognised by the Tax Practitioners Board for starters. That list can be built on later.

The corporate regulator and the prudential regulator should receive increased and ongoing funding to build their own inspection teams to do more reviews of accounting firms.

Independence issues and perceived conflicts of interest cause great headlines so some inspections that deep dive into the compliance firms have with independence rules would assist in understanding how firms deal with regulations designed to manage independence and conflict issues.

ASIC must also increase the number of sets of audit working papers reviewed to ensure the exercise it conducts on audit inspections is a better representation of audit practice across Australia. The current situation can be viewed as resulting in an unjust, unfair smear on professionals.

Increasing the sample size will give the inspection exercise greater credibility.

The Financial Reporting Council, which is the body that oversees audit and accounting standard setting, should meet in public so that all perceived conflicts of interest are declared in a public meeting.

Public meetings also offer observers the opportunity to watch how the individual members behave and whether their behaviour overall is consistent with the objectives of acting in the public interest.

The two standard setters that it oversees meet in public. The Financial Reporting Council ought to do so as well.

There is something else that needs to occur once this audit regulation inquiry is dispensed with by the committee. A comprehensive review on the state of corporate governance practice ought to be started so that a proper and holistic examination of the corporate governance landscape can be done.

Auditors and accounting professionals are not perfect but an inquiry that solely delves into audit regulation without more deeply considering the governance practices of the boards and senior management of entities regulated by the Corporations Act in the first instance is impaired from its very inception.

Boards of directors, management and the external auditor form what some governance commentators have termed the 'three-legged stool'. There would be great benefit in considering such a review because looking at auditors on their own focuses on only one piece of a very important puzzle.