If audit inspections are sufficiently robust to support ASIC’s claim that 20 per cent of reviewed big six audits inspected “did not obtain reasonable assurance” then we should be able to benchmark this claim against measures of reporting quality for the client firm-years that form the basis of this claim. (The six include mid-tier firms BDO and Grant Thornton but ASIC’s focus remains firmly on the big four, Deloitte, EY, KPMG and PwC, because they do the majority of audits for large listed companies).
Name firms, clients
Only then can we appreciate what the link is between observed deficiencies, possible audit failure, and unacceptably low financial reporting quality. The link between the “identified deficiencies” and possible audit failure could be made much clearer through more transparency.
The previous ASIC chairman, Greg Medcraft, lambasted the audit profession on the basis of similar figures, but apart from scare mongering, what does a review that keeps audit deficiencies hidden from public view achieve in terms of investor confidence? What do the big four themselves have to say about this? And where are the accounting bodies, institutional shareholders and the like? Why aren’t they taking a position on this?
Is further regulation justified?
My concern is that non-transparent indicators of allegedly low audit quality will be used to justify further regulation of the audit market, despite the absence of rigorous empirical evidence to support such claims. This is occurring in Britain, whereas in the US the relevant regulator (the PCAOB) has encouraged disclosure and subsequent empirical testing of the implications.
Which way are we headed in Australia? Let’s have a more rigorous discussion about actual and perceived audit quality issues based on sound economic logic and rigorous empirical evidence, including the outcomes of audit quality inspections.
Stephen Taylor is a professor of accounting at the University of Technology, Sydney
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