Is it time for a Royal Commission on the Auditing profession?

In mid-September 2021, The Australian arm of one of the world’s biggest and most prestigious accounting firms, KPMG, was fined A$613,000 by a US accounting watchdog, the Public Company Accounting Oversight Board (PCAOB), after a review found widespread cheating by staff on training tests over a four-year period.

KPMG had informed three bodies about cheating within the firm: the PCAOB in USA, and ASIC and the Chartered Accountants of Australia and New Zealand (CA ANZ) – the professional body to which most KPMG auditors belong – in Australia.

Then why is only the USA watchdog fining Australian auditors?

“Simply put, only the USA has statutory regulation of the Auditing profession that is truly independent of the Big-4 auditing firms” says Prof Janek Ratnatunga, the CEO of the Institute of Certified Management Accountants (ICMA).

“Whilst the auditing profession in the USA moved from peer reviewed self-regulation to statutory regulation by the PCAOB in the wake of the accounting and auditing scandals in the early 21st Century, Australia’s regulators remain toothless tigers”, says Prof Ratnatunga in a hard-hitting opinion piece that details the history of why the profession is regulated differently in the two countries.

“The only reason why KPMG Australia was targeted by PCAOB is that it undertakes audits on companies listed in the USA.”

Following the accounting scandals in the USA, a Senate Banking Committee was set-up in that country to evaluate the effectiveness of the profession’s self-regulatory framework. It found that the peer review system had never resulted in an adverse or qualified report on a major accounting firm in its 25 years of existence! The committee found that peer reviews were ‘mutual back scratching’ exercises.

“The lessons learnt in the USA, however, have had little or no impact in the regulation of accounting standard setters and auditors in Australia,” says Professor Ratnatunga.

In August 2019, a Parliamentary Joint Committee on Corporations and Financial Services inquiry into the regulation of auditing in Australia was set-up. Its report was released on 11 November 2020 with a lot of ‘motherhood’ statements about improving the business community’s perception of the auditing profession, etc., but no independent statutory body was set-up to regulate the auditing profession.

Instead, the Financial Reporting Council was tasked to oversee a formal review of the Australian Auditing Standards and ASIC was asked to review how it publicly reports the findings of its audit inspection program.

“The upshot was that ASIC has no statutory power to investigate the KPMG exam-cheating scandal”, says Prof Ratnatunga. “The only organisation that has some leeway to control the KPMG recalcitrants is the chartered accountants’ professional body, CA ANZ.”

“However, despite being first told about the matter 18 months ago, CA ANZ has yet to investigate or take any disciplinary action against KPMG Australia partners or staff over the systemic exam cheating.”

“This is typical of the glacial speed at which chartered accounting bodies worldwide move with regards to disciplinary matters involving the Big-4 professional service firms.”

“This is because globally, chartered accounting professional bodies like CA ANZ that are responsible for enforcing the professional standards of its members, receive major funding from Big-4 auditing firms – and almost always have Big-4 partners on their boards.”

“Clearly, independent oversight is needed of all the professional bodies that can undertake audits such as CA ANZ, CPA Australia and the Institute of Public Accountants”, says Professor Ratnatunga.

“These bodies should come under strict independent scrutiny of their auditor training programs and professional qualifications; similar to how the Tertiary Education Quality and Standards Agency (TEQSA) reviews higher education degrees issued by universities.”

“In addition, these auditing bodies must be subjected to independent statutory regulation. This is the only way to ensure that Australian reputation in corporate governance is maintained and capital markets are protected”, says Prof Ratnatunga.

Thus, he concluded that it really is time for a proper Royal Commission on the Accounting and Auditing Profession to be established, starting with questioning the need and appropriateness of the legislation calling for an audit; and then considering what should be its focus; and finally setting up an independent oversight body with the ability to take disciplinary actions against auditors should they deviate from what is expected of them.

The ICMA has been calling for such a Royal Commission since 2018.

[End]

For further comment on the above topic, please contact:

Prof Janek Ratnatunga
CEO, ICMA Australia & NZ
Mobile: +61432758380
Email: janek.ratnatunga@cmaaustralia.edu.au

About the Author
Professor Janek Ratnatunga is the CEO of the Institute of Certified Management Accountants, Australia & NZ. He has held senior appointments at the University of South Australia, Monash University, University of Melbourne, and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked as a chartered accountant with KPMG. He has also been a consultant to many large Australian and international companies and to the World Bank.

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