The federal government has released a consultation paper proposing stricter regulation of Australia's 'big four' audit and consulting firms — KPMG, PwC, EY and Deloitte — following a series of ethical failures. The reforms could lead to a break-up of the firms, separating their audit and consulting arms. The paper, published by Treasury, is unusually blunt, stating: 'In recent years, we have seen behaviour from large accounting, auditing, and consulting firms in Australia that is not fair and honest.'
Why the Government Is Acting Now
Just this week, two junior EY employees were sacked for allegedly accessing Prime Minister Anthony Albanese's private bank information while working as contractors at Commonwealth Bank. This follows more serious admissions from KPMG that its senior partners accessed confidential client information to help bid for other companies' work. These scandals come three years after PwC admitted to using confidential government information about new corporate tax avoidance rules to help clients dodge the rules, leading to a federal inquiry in 2024 that made 40 recommendations.
Finally Cracking Down on Firms, Not Individuals
One key reform is to regulate accounting and auditing firms — not just individual auditors. The Treasury paper proposes that all audit firms, including partnerships, be licensed by the Australian Securities and Investments Commission (ASIC). The licence would impose audit quality management, ethical and governance obligations. ASIC could then take enforcement action, including imposing additional licence conditions, issuing infringement notices, or revoking a firm's licence. A new penalty for licence breaches is proposed, capped at $910 million for the biggest four firms.
What About Splitting the Firms?
Another significant proposal is to force companies to split their auditing and consulting work into separate entities. This would limit audit firms to traditional audit work, while consulting work would need to be done by a separate business entity. There is a precedent from the banking royal commission, which led to banks separating their financial advice and wealth businesses after misconduct. However, there are arguments against a break-up: accounting firms often win consulting work due to deep corporate knowledge, and separating them could require hiring new firms, taking time. Smaller firms, which haven't been tainted by scandals, would also need to obtain audit licences, potentially increasing costs.
Inspections Have Actually Been Falling
The success of the proposed licensing system depends on ASIC actively monitoring compliance. However, the Treasury paper reveals that the number of audit inspections by ASIC has fallen over the past decade. The Financial Reporting Council said in 2023 that 'it considers the number of audit files reviewed by ASIC to be small, given there are over 3,000 registered company auditors (over 500 of whom are audit-listed entities) and 200 authorised audit companies (of which 50 are audit-listed companies).' Tougher penalties are useless without resources to monitor, investigate and enforce compliance. ASIC will need more funding to do more checks.
The audit and consulting firms are expected to oppose the reforms, but after repeated breaches of trust, stronger action is needed. Public submissions on the consultation paper are open until August 12.
