Multiple auditors from audit firms of all sizes were unable to effectively demonstrate compliance with independence and conflict of interest obligations, a new ASIC review has revealed.
The findings, outlined in Report 817 Building trust: Auditor compliance with independence and conflict of interest obligations (REP 817), follow ASIC action against several auditors and audit firm identified as in likely breach of their obligations through this review.
ASIC Commissioner Kate O'Rourke said that the audit sector directly contributes to the quality and integrity of financial reporting by companies and that it needs to observe independence requirements.
'Auditor independence underpins stakeholder trust and confidence in the audit process and the reliability of the financial information being audited. Unfortunately, our review found that many auditors failed to meet the basic independence requirements, and others failed to identify and critically evaluate potential threats to their independence.
'It is not enough for auditors to adopt a tick-a-box approach to complying with these important obligations. They must think more critically about whether they are independent and be alive to even the perception that their independence is compromised,' said Ms O'Rourke.
ASIC's review found a disappointing number of likely breaches of prescriptive independence requirements. Fifteen auditors were found to be in likely breach of rotation requirements, relationship prohibitions or providing a prohibited non-audit service.
Nine auditors failed to demonstrate how they complied with mandatory rotation requirements that prevent auditors from auditing a listed client for more than five consecutive years.
Five auditors appeared to hold prohibited relationships with clients, including one auditor who was also an officeholder of their client.
None of the 15 auditors flagged by ASIC as having breached their obligations had proactively reported the potential breaches to ASIC, despite receiving a reminder from ASIC in October last year.
'The failure of these auditors to report breaches to ASIC, including of the longstanding prescriptive independence obligations, is concerning,' said Ms O'Rourke.
As a result of this review, ASIC accepted the cancellation of a company auditor's registration for independence failures, issued a $78,250 infringement notice to Nexia Perth over prohibited services, and entered into three court enforceable undertakings with auditors associated with Hall Chadwick (NSW)and the firm over audit rotation failures.
ASIC is conducting additional inquiries into potential breaches identified during this review.
'Auditor independence is fundamental to audit quality and integrity. A strong focus on independence not only builds trust, it also fosters more rigorous challenge in the audit process thereby enhancing the preparation of high-quality financial information.
'We expect auditors to carefully consider this report and use its findings to address gaps in their compliance,' Ms O'Rourke said.
Background
How ASIC selected its review cohort
The 48 auditors and 19 audit firms that were the subject of ASIC's review were selected using a risk based, data driven methodology. This involved reviewing data relating to 2,900 auditors for indicators of potential threats to independence arising from:
- the provision of non-audit services to audit clients
- long association with clients (including rotation), and
- relationships between auditors and clients or their officeholders (including explicitly prohibited relationships).
The final review cohort of 48 auditors included individual auditors as well as auditors from the following firms:
- BDO Audit Pty Ltd
- BDO Audit (WA) Pty Ltd
- Connect National Audit Pty Ltd
- Deloitte Touche Tohmatsu
- Ernst & Young
- Grant Thornton Audit Pty Ltd
- Hall Chadwick (NSW)
- Hall Chadwick WA Audit Pty Ltd
- Kelly Partners (Sydney) Audit Partnership
- KPMG Australia
- Pitcher Partners
- Nexia Perth Audit Services Pty Ltd
- PKF Melbourne Audit & Assurance Pty Ltd
- PricewaterhouseCoopers
- RSM Australia Partners
- Stantons International Audit and Consulting Pty Ltd
- Trood Pratt Audit & Assurance Services Pty Ltd
- William Buck (QLD) Pty Ltd
- William Buck Audit (WA) Pty Ltd
REP 817 is the second report from ASIC's expanded program of work to improve financial report and audit quality. It follows Report 816 Accounting for your super: ASIC's review into the financial reporting and audit of super funds. It highlights that ASIC is particularly concerned to ensure auditors are vigorously testing information on investments including asset valuations, especially when those assets are impaired or valuations are under pressure.
An annual report on our financial reporting and audit surveillance of companies and auditors will be published later in October.
ASIC announced this expanded program of work to support financial report and audit quality last year (24-101MR).
For 2025-26, ASIC's financial reporting and audit program will increase the number of audit surveillances and include audit files where there are potential independence concerns.
Downloads
Report 817 Building trust: Auditor compliance with independence and conflict of interest obligations
