This submission by Jeffrey Knapp to the impending Parliamentary Inquiry into the Regulation of Auditing in Australia documents how the Big 4 audit firms – KPMG, PwC, Deloitte and EY – have undermined Australian auditing and financial reporting practice for multinational clients. Knapp includes a number of recommendations.
The purpose of this submission is to outline how the Big 4 audit firms have failed in their public duty as auditors of multinational companies. The submission also briefly covers the audit independence problems arising from Big 4 audit firms offering services in insolvency and for IPOs. In the final section of the submission, a series of recommendations are presented.
- The Big 4 firms have enabled multinational clients to switch from general purpose financial reports to special purpose financial reports without reason or explanation. The question of why has not been publicly answered.   
- The Big 4 firms have enabled multinational clients to prepare annual financial reports for the head company in Australia that do not consolidate subsidiaries and that consequently have little or no information content for external users.    
- The Big 4 firms have enabled multinational clients to prepare annual financial reports on the basis that the financial reports are intended for the use of a sole foreign shareholder but not intended for use by Australian stakeholders.
- The Big 4 firms have enabled multinational clients to prepare annual financial reports on the basis that the head company in Australia is a small proprietary company merely providing services offshore or part of a small corporate group. This form over substance approach has assisted multinational clients of the Big 4 firms to avoid (evade) income tax in Australia.    
- The Big 4 firms have enabled multinational clients to withhold annual financial reports from the Australian public for months, or years, at a time by failing to report this misconduct to the Australian Securities and Investments Commission as required by section 311 of the Corporations Act.  
- Representatives and alumni of the Big 4 firms on the Australian Accounting Standards Board (AASB) voted to remove the requirement for disclosure of auditor fees in general purpose financial reports of multinational clients. The removal of this requirement was contrary to the advice in the Ramsay Report on conflicts of interest. 
- Representatives and alumni of the Big 4 firms sitting on the AASB decided that multinational clients are not “publicly accountable”. In this regard, the AASB has consistently conflated accounting for small and medium sized entities with accounting for multinationals thereby delivering reduced disclosures and less transparency for the multinational clients of the Big 4 firms.
- The Big 4 firms appear to regularly suspend professionalism and ignore the principle of substance over form when auditing the annual financial reports of multinational clients for compliance with accounting standards.        
- The Big 4 firms are secretive about the audit fees and non-audit fees they earn from multinational clients.
Banks and insolvency services
- KPMG’s merger with Ferrier Hodgson and PwC’s merger with PPB advisory means the firms no longer meet the requirement for audit independence in respect of ANZ and Westpac respectively.
- KPMG previously walked away from insolvency services because of concerns about the appearance of audit independence. Now they are back doing insolvency services bigger than they have ever done it before.
Initial public offers and investigating accountants’ reports
- There have been some truly awful Big 4 firm audits of companies after their IPO’s. 
- The dual role of a Big 4 firm as investigating accountant for an IPO and then auditor appears to be marketed by Big 4 firms as a package deal. Imagine the following pitch: “Appoint us as the investigating accountant and we will look after you for the audit too.”
- Audit scepticism is compromised if the auditor is weighed down by the potential negative implications of the audit for the firm in its role as the investigating accountant in the IPO. In these circumstances the auditor is under additional pressure to assist the client manage earnings to meet IPO forecasts.
- It is recommended that the AASB be required to publicly explain: (a) why multinationals that incorporate Australian companies to conduct Australian businesses are not publicly accountable in Australia; and (b) why it removed the requirement for auditor fee disclosures from general purpose financial statements of multinationals.
- It is recommended that ASIC be required to: (a) report to the Parliament on the annual financial reporting lodgement practices of multinational companies; and (b) publicly explain why ASIC has failed to act against multinational companies and their Big 4 audit firms when there is persistent misconduct in financial reporting lodgements.
- It is recommended that ASIC be required to conduct a bi-annual compliance review of multinational annual financial reports and publicly identify any companies that it finds do not comply with accounting standards and their auditors.
- It is recommended that ASIC’s audit inspection reports of the Big 4 audit firms for the 18 months to 30 June 2018 be placed on the public record without redactions. It is further recommended that ASIC be required to place unredacted versions of all future audit inspection reports of the Big 4 audit firms on the public record.
- It is recommended that further scrutiny of multinational financial reporting practices and Big 4 audits be facilitated by reducing the cost of accessing their annual financial reports on ASIC’s public database. It is recommended annual financial reports on the database be accessible for a nominal fee of $1 each consistent with the jurisdictions of New Zealand and the United Kingdom.
- It is recommended that the Big 4 audit firms be required to divest their insolvency services businesses unless they can publicly explain why the retention of insolvency businesses and big bank audit clients does not breach independence in appearance.
- It is recommended that Big 4 audit firms be disqualified from auditing IPO clients for a period of five years.
On 1 August 2019, the Senate referred an inquiry into the regulation of auditing in Australia to the Parliamentary Joint Committee on Corporations and Financial services for report by 1 March 2020. Submissions, including this author’s, can be found here.
The following list of references is provided for the reader’s interest:
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 Knapp, J., Big four accounting firms avoid scrutiny in multinational tax avoidance, 25 February 2016 http://theconversation.com/big-four-accounting-firms-avoid-scrutiny-in-multinational-tax-avoidance-54879 (viewed 31 October 2019)
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 Fresenius Medical Care Australia Pty Ltd (ACN 067 557 877), general purpose financial statements for 31 December 2018, unqualified audit report signed by KPMG 28 June 2019.
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 Australian Accounting Standards Board, AASB 1054 Additional Australian Disclosures, para. 5A
 Australian Accounting Standards Board, AASB 1053 Application of Tiers of Australian Accounting Standards, Appendix B.
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 Accounting Professional & Ethical Standards Board APES 110 Code of Ethics for Professional Accountants, definition of independence includes: “Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a Firm’s, or a member of the Audit and Assurance Team’s, integrity, objectivity or professional scepticism has been compromised.”
 West, M., Conflicts of Interest “R”” Us: KPMG pursues PwC back into insolvency, 26 March 2019 https://www.michaelwest.com.au/conflicts-of-interestrus-kpmg-pursues-pwc-back-into-insolvency/ (viewed 31 October 2019)
 West, M., Dick Smith float looks like window dressing, 5 February 2016
 West, M., Tick and flick: PwC embroiled in Vocation collapse, 4 April 2017
https://www.michaelwest.com.au/tick-flick-pwc-embroiled-in-vocation-collapse/ (viewed 31 October 2019)
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Jeffrey is a retired lecturer in accounting at the University of NSW. His forensic accounting work exposing multinational companies for tax avoidance and accounting irregularities led to the 2015 Senate Inquiry into Corporate Tax Avoidance and subsequent reforms.