The perils of banned lists for non-audit services

Tom Ravlic
The recent interim report of the inquiry into the regulation of auditing in Australia contains interesting elements meriting further analysis but most will ignore them in favour of chasing other colourful balls being flung around by politicians in an attempt to keep us all amused.

It is understandable to some extent. Audit is not exactly subject matter for water cooler conversation at the office in the same way as the latest episode of Masterchef, Married at First Sight - or a video in which a former parliamentarian suggests the coronavirus is a population control measure by the Chinese.

Audit is also not usually at the centre of controversy and discussions about developments in audit tend to be characterised as having the therapeutic benefit of being a non-chemical treatment for insomnia.

This is exactly why most people will tune out to the work of the parliamentary committee now that it has issued an interim report. It is not an area most people understand and yet it is so important to the functioning of good companies and the flow of information into a sceptical capital market.

They should be tuning in some more.

Corporations should be focused on the recommendations in the interim report because there are several that will increase business costs; you know, expenses.

Companies frequently complain about compliance costs. They complain about red tape and also green tape.

The parliamentary committee has added to the expenses that flow to the bottom line of corporations by recommending that a company does further work where necessary on internal controls related to financial reporting.

That will be a cost to business in some form even if it is a sunken cost in training staff or hiring consultants to assist with internal control reviews if required.

Then there is the notion of getting these internal control assessments audited, which is a direct steal from the regulatory environment in the United States.

It will increase business costs but at what point will the government through Federal Treasury actually do a proper regulatory impact assessment?

What will be expected increases in costs be to businesses of this proposed change? It is clear that the winners will be those in professional practices that have the skill set and are able to provide the audit of internal controls, but what will business have to cough up to satisfy a new regulatory requirement?

Banking Day reported last week that a similar regulatory change in the United States led to audit fees soaring even for entities that were not the target of the post-Enron tightening of governance rules.

Care needs to be taken to ensure the suggested changes to the Corporations Act 2001 do not result in entities having to undertake additional work for little additional benefit.

It would be prudent for the parliamentary committee responsible for this recommendation to get an assessment of the possible costs of these changes so that there is no fee shock when the changes come into place.

There is nothing wrong with the notion of having larger companies undergo further examination of the way they run their businesses because the Hayne Royal Commission found that there were enough problems with the manner in which companies got their business in through the front door.

What is wrong is not getting an understanding of what the costs might be before venturing into that territory.

A further recommendation needing closer examination is the one concerning the black letter list of things accounting firms cannot do.

Who is this recommendation assisting?

The major accounting firms have banks that are also SEC clients. These conditions are firmly entrenched in that part of the corporate world.

It should not be necessary for a black letter banned services list to exist in this jurisdiction for those entities given those financial services behemoths are already subject to those requirements elsewhere.

The ethical standards already cover other transactions and it should be plain to everybody what services are inconsistent with the provision of the external audit of financial statements.

Anybody who can read should be able to understand the ethical pronouncements.

What we are dealing with is a regulator that has looked pretty lame in the audit space when it has come to enforcement wanting a win, and the parliamentary committee being able to give it one by recommending this black letter list.

Let's be clear on one thing for the non-experts on parliamentary committees and in the broader commentariat - there is no service in this country provided by an accounting professional (either as an individual or from within a firm) that is unregulated.

Before anybody legislates a shopping list of stuff you cannot sell to an audit client - that are already covered in the ethical pronouncements - people across the regulatory system need to reflect whether this addition material is worth the trouble.

Are black letter lists on areas such as independence and allowed services simply a revision or addition for needy lawyers seeking an excuse to not take people that have clearly failed to follow principles in the first place to court? Does everything need to be nailed down in a list of things?

Universities teach the ethical code. Professional qualifications embed the code and key principles as a part of training.

Why on earth are people adding more stuff to literature that will simply be more stuff for enforcement agencies to enforce, which they don't do so brilliantly now.

And one other thing: the analysis of conflicts and possible threats to independence will not end just because you have a 'naughty services list'.

Sceptics, the usual raggle-taggle mob of global academic critics of the accounting profession and politicians with a jaundiced view of the professional world, will simply focus on possible threats to independence from the amount of dosh coming in the front door for services that are allowed when compared with the price of the external audit.

Anybody that thinks a list of 'naughty services' euthanises the debate is one sandwich short of a picnic.