Sector reform and regulation – The outlook for audit in 2025

In this article, we outline key developments from a recent parliamentary inquiry that made sweeping recommendations to reform the accounting, audit and consulting industry and the government’s plan to merge the three financial reporting bodies.

PJC inquiry into structural challenges in the audit, assurance and consultancy industry

Last November, the Parliamentary Joint Committee on Corporations and Financial Services released its final report - Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry (PJC Report), following the PwC tax scandal. Committee chair ALP Senator, Deborah O’Neill noted the Big Four accounting firms collectively audit 193 of the top 200 companies in Australia. The PJC Report made 40 sweeping recommendations to reform the sector, with 16 recommendations listed as priorities. Here are the key recommendations of interest for boards and audit committees.

Audit and non-audit services

• Improved disclosure of non-audit services: Financial statements disclosure requirements to cover all relevant fees (that may raise a conflict of interests) paid to the entity’s auditor for audit and non-audit services (Recommendation 7).
• Ban on non-audit services from large firms to audit clients: Multi-disciplinary large accounting firms (and associated entities) should not be permitted to supply audit and non-audit/consultancy services to the same client (and associated entities) (Recommendation 8).
• Split of audit and non-audit services: Operational separation of audit from non-audit practices in a way consistent with the UK and global best practice (Recommendation 9).
• Auditor’s independence declaration: Expand auditor’s independence declaration to confirm no prohibited non-audit services have been provided (Recommendation 14).

Audit quality

• Internal control signoffs: Require entities that have their financial reports audited to also establish and maintain an internal controls framework for financial reporting, including requirements that management evaluate and annually report on the effectiveness of the entity’s internal control framework and the external auditor report on management’s assessment of the entity's internal control framework (Recommendation 16).
• Compulsory 10-year audit tenders: Mandatory public tendering of financial audit services of Public Interest Entities (including listed companies and the large multidisciplinary partnerships, such as the Big Four) every 10 years (Recommendation 15).
• Consider measures to increase audit services competition: Consider mechanisms to increase competition within the audit sector, such as mandating firm rotation for auditors, and mandating public interest entities be subject to joint audits which include smaller audit firms (Recommendation 40).

Regulatory oversight

• Bolstered ASIC audit inspection program: ASIC to re-establish program of random audit inspection, supplement its existing risk-based approach by also reviewing audit files where conflicts of interest arise from the Big Four firms providing other services and increase resources that it devotes to financial report inspections and audit inspections until there is a “significant improvement” in audit quality (Recommendation 11).
• Publication of individual audit firm reports: Implement a legislative requirement that ASIC publish all individual audit firm inspection reports (Recommendation 12).
• Disclosure of auditor tenure and fees: Implement the FRC recommendations to legislate disclosure of auditor tenure and audit fees in directors’ reports and going concern assessments in directors’ declarations (Recommendation 13).

Organisational governance

• Capping firm partner size: Reducing the maximum size of accounting partnerships from 1000 to a maximum of 400 partners, to align with the limits of legal partnerships, with a transition period of up to five years to enable smooth implementation (Recommendation 3).

What’s next?

Coalition members of the PJC slightly deviated from ALP members in a few areas, including rejecting the proposed cap on firm partner size and proposed ban on provision of non-audit services to audit clients by large firms. The Coalition cited practical challenges and the need to evaluate the impact of the other recommendations before considering significant market intervention. The Assistant Treasurer, Stephen Jones, welcomed the report and said the government will respond in due course.

Separately, Treasury also conducted its own parallel consultation into the regulation of accounting, auditing and consulting firms in Australia. We are still awaiting the release of the final report from Treasury, following the release of the PJC Report. In our AICD submission, directors noted that audit quality in Australia is strong and that the current regulatory framework is fit-for-purpose.

Proposed merger of the AASB, AUASB and FRC

On 23 January, Treasury released a consultation paper inviting views on a proposed body that combines the Australian Accounting Standards Board (AASB), the Auditing and Assurance Standards Board (AUASB) and the Financial Reporting Council (FRC). Industry body CA ANZ has called this ‘the most significant shake-up to the Australian standards setting bodies in decades’.

The recent development of sustainability and climate-related financial disclosures in Australia and internationally has highlighted the importance of ensuring institutional arrangements for standard setting are flexible to adjust to the evolving reporting landscape (e.g. the creation of the International Sustainability Standards Board in 2021).

Proposal at a glance:

• Responsible Minister – Minister will appoint Chair and new Board members. Currently, the Minister appoints the Chair and members of the FRC and Chairs of the AASB and AUASB. The FRC currently appoints the other members of the AASB and AUASB.
• Board – High-level governance and oversight role, supported by a CEO and permanent staff. The Board will appoint the Chairs and members of the technical standard setting committees, and any other committees established by the Board.
• Standard setting committees – There will be initially three dedicated technical committees: Accounting standards committee, Sustainability reporting standards committee, Audit & assurance standards committee (including sustainability assurance), and other committees as required.

We note the PJC Report also recommended the new body has structural, governance and administrative arrangements independent from Treasury, including by ensuring it does not include individuals with a current financial interest in entities under the direct governance of the body.

What’s next?

The consultation closes on 21 February. Member feedback is welcome via policy@aicd.com.au. In particular, we would like to hear from members on the following questions:

• Do you agree with the proposed structure for the new body? Note: The government is seeking feedback on the design of the single body and is not seeking views on the merits of combining the three financial bodies.
• Do you agree with the proposed model for issuing standards? Are there any alternative mechanisms that could be adopted that better meet the design principles?
• Should requirements be imposed that candidates for membership of the new board and/or its technical standard-setting committees must demonstrate appropriate independence from industry (for example, not having worked in an accounting or auditing firm for a specified period or not having financial ties to a firm)?