The former chairman of the Australian Securities and Investments Commission has warned of Enron-style corporate collapses thanks to failings of the nation’s auditing industry, according to ABC.net news reports this week.
Former ASIC Chairman Greg Medcraft warned that declining audit quality runs the risk of high-profile corporate collapses, pointing to the Enron scandal that went undetected by auditors — described as the “gatekeepers” that “facilitate trust,” Medcraft said.
“Auditors are not skeptical enough. They don’t challenge enough,” he told the publication. “Often, there is a conflict between the consulting business and the audit business of the big four firms.”
The so-called Big Four auditors in Australia — PricewaterhouseCoopers (PwC), Ernst & Young, Deloitte and KPMG — are facing criticism as policymakers call for an inquiry into the players’ market dominance and allegations of conflicts of interest in their auditing operations.
“Often, the big problem that auditing firms face is that staff come into the auditing firm but they actually want to move to a consulting firm where the money is being made as quickly as possible,” Medcraft explained. “So, because of this attractiveness of consulting, audit is not where people often want to stay.”
He suggested that more competition, not tougher regulation, is key to keeping auditors in check and keeping auditing standards elevated.
Medcraft declined to comment on allegations that the ASIC has been too lenient with the companies it regulates, and too slow to prosecute in the face of wrongdoing.
Earlier this month Australia’s largest financial institutions defended their use of auditors as consultants, which led to allegations of conflicts of interest. The Parliamentary Joint Committee on Corporations and Financial Services is being pressed by some to investigate those claims and examine the state of the auditing industry overall.
“We have strict policies and procedures in place that govern the independence and work of our auditors and these are regularly reviewed by the Board and the Audit Committee,” a spokesperson for Commonwealth Bank, which receives auditing services by PwC, said at the time.
Australia’s mounting pressure on the Big Four auditors mirrors similar criticism arising in the U.K., where some regulators have called for a mandatory breakup of the companies following several high-profile corporate collapses.
“We are not confident in relying solely on the integrity of auditors to do the right thing in the face of conflicting interest,” said the U.K. Business, Energy and Industrial Strategy Committee in a report published earlier this year. “For the big firms, audits seem too often to be the route to milking the cash cow of consultancy business.”
Some auditors have vowed to ramp up oversight of their auditing operations to improve quality, but have so far resisted those breakup calls.
In June, PwC announced plans to add 500 more auditors in the U.K. and to launch a digital audit team, stronger training practices and an internal review of existing clients in an effort to “achieve a return that allows continual investment in and focus on quality.” Just days prior, KPMG similarly revealed plans to heighten oversight of its U.K. auditing operations, creating a new executive committee that will manage performance controls.
But some argue that those internal efforts are insufficient.
According to the U.K. Financial Reporting Council, all four of the top auditors in the U.K. failed to achieve its audit quality standards, with only 75 percent of the audits of the U.K.’s largest 350 public firms meeting that performance threshold.
“At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable,” concluded FRC Chief Executive Stephen Haddrill last month.
A Broader Debate
Amid calls for a breakup, tougher regulation or a surge in competition to improve auditing performance, a broader debate is brewing over the role of the corporate auditor in identifying and preventing fraud.
Earlier this year, Grant Thornton CEO David Dunckley was met with scrutiny from MPs in the House of Commons, which questioned the auditor’s failure to detect fraud at defunct cafe chain Patieerie Valerie. According to Dunckley, auditors “are not looking for fraud.”
According to Financial Times reports, in response, one MP questioned, “What is the point of audit in the first place?”