ACSI submission to Treasury’s consultation on the regulation of accounting, auditing and consulting firms.
About ACSI
ACSI was created to be a strong voice on financially material sustainability and corporate governance risks and opportunities. Our members include Australian and international asset owners and institutional investors with more than $1.9 trillion in funds under management. Through our company engagement, policy advocacy, research and education, ACSI supports members in exercising active ownership, which enhances the long-term value of the retirement savings entrusted to them to manage.
ACSI members can achieve value for their beneficiaries through genuine and permanent improvements to the environmental, social and governance practices of the companies in which they invest. ACSI’s focus is on the ASX300, and our comments reflect this context. Our response focuses on Section 6: ‘Enhancing audit market dynamism for reporting entities’, although we also make high-level comments on other areas.
Summary position
Functioning markets require appropriate transparency and quality auditing that ultimately supports investor confidence. Investors rely on accuracy and integrity in company reporting, to support sustainable returns to their beneficiaries. Auditors play a key role in the integrity of financial reporting. Auditors also assist the audit committee to discharge its responsibilities and provide advice and insight to the board. We support a range of interventions to support greater audit quality and appropriate audit governance.
Audit market dynamism for reporting entities
ACSI welcomes the proposals in Section 6. Audit tenure remains an issue at some companies, with a small handful retaining the same auditor for 50 or 60 years. ACSI raises auditor tenure in discussion with listed companies to encourage better corporate governance practice.
ACSI’s Governance Guidelines are a clear statement of our members’ expectations about the governance practices of the companies in which they invest. They provide insights about the governance issues of material concern to our members. The Guidelines state that ACSI expects companies to rotate audit firms, not just individual audit partners, without specifying a time frame. ACSI expects auditors to be, and be perceived to be, independent of the company, including of its directors and executives. While tenure is only one factor, longstanding tenure is considered a potential independence issue for directors and others, and the same case could be made for audit firms themselves.
Option 6A
ACSI supports Option 6A (Additional Reporting obligations for reporting entities regarding auditor tenure). We support disclosure as a means to drive more transparency on:
- the company’s approach
- audit firm and lead audit tenure
- current lead auditor commencement, and
- most recent audit tender date
Option 6B
ACSI also supports Option 6B (Mandatory periodic tendering for audit services), to drive better governance by appropriately assessing an audit firm’s continued role. While the international experience has been somewhat mixed, the benefits of tendering can include the potential for decreased fees, higher quality audits, greater independence of the auditor mindset and maintenance of professional scepticism, and the potential for greater competition in the market. Our view is that the potential benefits are likely to outweigh the potential costs.
Option 6C
There are some competing considerations in respect of Option 6C. In 2020, the average audit tenure in the ASX200 was 13.2 years, so a 20-year rotation timeframe does not seem unachievable. On the other hand, costs are associated and company circumstances need to be considered (for example, rotation may not be appropriate during a corporate transaction or crisis response).
Therefore, while ACSI supports periodic audit rotation, at the same time, we appreciate that this can raise logistical challenges. At the very least, it would be appropriate and there is benefit in requiring companies to disclose, on an ‘if not, why not’ basis, the reasons why they choose not to rotate auditors after a 20-year tender, and for every subsequent tender.
Other comments
The Board’s role
Auditors play a key role in supporting appropriate financial reporting, but company management, directors and the audit committee also have a fundamental responsibility for the quality of that reporting. In particular, ACSI expects boards and audit committee members to closely monitor auditor quality, judgement and independence. This includes ensuring the ratio of audit to non-audit fees remains low to reduce potential, or perceived, conflicts of interest and consequential effects on independence.
Increasing accountability within the audit sector
ACSI does not support one option over another for enhancing disciplinary processes and sanctions, however we see benefits in a regime with clear and reasonable accountability for poor behaviour. It is important to ensure appropriate regulation of, and consequences for, audit firms when there are instances of egregious behaviour. A new regulatory regime focused on firm-level expectations and inspections would be appropriate, and therefore we support the focus on quality management and ethical obligations contemplated in Options 1A, 1B and 1C.
Managing conflicts of interest in multidisciplinary firms
There are opportunities to enhance appropriate governance structures to drive a focus on audit quality. While we acknowledge the potential complexities of some of the options, ACSI supports additional regulation to address the structural conflicts of interest and ensure a focus on audit quality and good governance.
A mandatory audit firm governance code with appropriate corresponding disclosure requirements (relevant to Option 2D), referencing international work and approaches in other jurisdictions, would be appropriate. More significant steps such as operational separation (Option 2B) could also be appropriate, though a more detailed cost and benefit analysis would be helpful for further consultation. In the UK, it appears that operational separation has sharpened the focus of auditors on the delivery of high-quality audits, with a “move from a client-centric, financials-first culture to one with a much greater focus on audit quality”1. Greater independence on governance boards, a consideration of audit firm partnership size, a focus on the processes and requirements of audit in the governance of the audit system and oversight of quality management would all seem reasonable steps.
Audit firm surveillance and enhancing disciplinary processes and sanctions
ACSI supports Option 4: Mandate the frequency of audit reviews, increase the level of surveillance, and publish findings. ACSI supports more extensive surveillance of audit firms and considers it appropriate for the government to mandate the frequency of the review cycle and fund ASIC appropriately. Within these parameters, ASIC should be in a position to continue to make a risk-based assessment as to which audits are to be reviewed alongside the randomised cycle.
In addition, ACSI considers that aggregate information is not sufficiently transparent for external stakeholders such as investors. While audit surveillance happens after the fact, and annual samples will differ, more specific reports provide insight into sectoral concerns and structural or systemic issues. ACSI would support more transparent audit surveillance findings. In respect of Option 5, we also support a move to consistency in pecuniary penalties, as the Consultation Paper outlines, the current penalties for contravention of auditor requirements appear to be low. We also support further remediation powers for ASIC.
- Financial Reporting Council, Annual Review of Audit Quality 2025, page 20, sourced from this link.
