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Australia: Company directors urged to review auditors every five years

Sep 28, 2022

Companies must undertake a rigorous review of their external auditors every five years to ensure investor confidence in the markets and avoid the big accounting scandals experienced overseas, the leading body for company directors says.

Audit committees also must particularly scrutinise whether their auditors are also doing non-audit work for their companies and consider how willing they are to stand up to management, the Australian Institute of Company Directors recommended.

In a new guide for audit committees for the “periodic comprehensive review of the external auditor”, the AICD said listed companies should undertake detailed five-year reviews as well as their annual reviews of the Australian Securities and Investments Commission’s audit quality findings.

“It’s been a long time since we’ve had a big audit scandal in Australia, but that doesn’t mean it can’t happen, directors can’t be complacent,” the AICD’s general manager of governance, Louise Petschler, said.

“So our aim with this tool is to give audit committees part of listed companies to give them a clear tool.”

Audit quality is undergoing an unprecedented period of scrutiny globally amid high-profile scandals such as the Wirecard saga, parliamentary inquiries and possible regulatory reform.

Other countries such as Canada, where there had been audit scandals, had more rigorous measures in place for boards to ensure audit quality, Ms Petschler said, and it was time for Australia to step up.

“There’s a lot of focus around the issue of audit – internal and external – there’s moves all around the place. So, it’s a really good time to provide something that steps audit committees through ... a path on making sure audit quality is where we want it to be,” she said.

“We now have ASIC sharing their findings on an ongoing basis with [companies’] audit committees, there’s a strong global focus on audit quality, and firms themselves looking at different ways of managing their dominance in the market.”

The corporate watchdog announced in June that it would bypass accounting firms to directly tell company directors when their auditors have made significant errors in addition to its annual audit quality reports.

EY is considering splitting its audit and consulting arms into separate firms in what would be the biggest shake-up of the professional services industry in 20 years. The move would help it get around global regulatory rules that prevent the firms providing lucrative non-audit services to audit clients.

Step-by-step guide
Ms Petschler said the five-yearly reviews would be “a lot of work” for audit committees, but that this was “their bread and butter” and that the market expected companies to have rigour in their auditor selection process.

Under the guidance, audit committees would complete a wide-ranging review into their external audit firms every five years by consulting the auditors and company management to then recommend whether the providers were retained without conditions, kept on with some changes, or whether the audit work should go to public tender.

It recommended committees consider who their auditors were, how long they had provided this service, their firm transparency reports, whether audits were done on time and how they were undertaken.

They should talk to the company’s management about “how forthright” the auditor was in “dealing with difficult situations”, as this may speak to their independence, and whether they sufficiently challenged “estimates and accounting policy choices”.

They should also look at the quality of the teams put forward by audit firms, the AICD said, looking at their technical expertise, resources and how involved the audit partner was in overseeing juniors’ work.

Internal auditors should also give feedback to their company boards, the guide said, and external auditors should answer questions about their independence and any issues flagged by external regulators.

Ms Petschler said mandatory auditor rotation was not a solution to potential issues with firms becoming “captured” by companies through long relationships because the Australian market was so small, but that rigorous reviews could help.

“Particularly in Australia, but also globally, the big four are very dominant – and we’re a relatively small economy and they dominate on both the advice and the audit size, so it reflects that reality,” she said.

While Australian audit terms were “traditionally very long” compared to other countries, it should suffice to rotate the lead partners on audits regularly, rather than rotating firms, she added.

[Financial Review]

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