Threat posed to small audit firms

 

The Federal Government has rejected proposals that would have enabled small accounting firms to continue auditing their long-term clients.

However, backers of the proposed change believe the Government may revisit the issue later in the year.

Mandatory auditor rotation was one of many corporate law issues debated in Federal Parliament last week, prior to passage of the Clerp 9 legislation.

Of all the changes flowing from the Clerp 9 process, the biggest impact in Western Australia could flow from the mandated rotation of audit partners after a period of five years.

The Institute of Chartered Accountants in Australia said audit firms would need to have at least three audit partners to ensure both the lead and review audit partner could be rotated every five years.

“This may result in most listed company audits transferring to the ‘big 4’ accounting firms or second-tier firms in Sydney and Melbourne, because smaller audit firms in Perth will not have enough partners,” the Institute’s technical adviser Keith Reilly said.

He said the change would affect nine national firms and 25 smaller firms in Western Australia.

The joint parliamentary committee on corporations and financial services expressed similar concerns.

“The fact that some firms will not have enough lead and review auditors to meet the rotation obligations, and thus continue to provide audit services, is of great concern,” the committee says in a report released this month.

“The evidence strongly suggests that, in WA and SA particularly, suitable alternative services will not necessarily be available to clients of displaced firms.”

The committee recommended that audit rotation only apply to auditors of the top 300 listed companies.

Committee chairman Senator Grant Chapman remains hopeful the auditor rotation rules will be changed.

“I’ve had an indication the Government is prepared to give it further consideration,” Senator Chapman said.

“The Government wants more time to think about it.”

A spokesman for the parliamentary secretary to the treasurer, Ross Cameron, said the Government wanted to introduce its Clerp 9 reforms from July 1.

He added that small audit firms could apply for the rotation period to be extended from five years to seven years.

The debate over Clerp 9 highlighted wide splits between the Government and Labor.

Hence, the next Federal election could have a major bearing on the final shape of corporate law reforms.

Labor wanted to ban audit firms from providing certain non-audit services that “potentially compromise the independence of the auditor”, such as valuations, actuarial services, internal audits and “management functions”.

It also wanted the cooling off period before a former auditor can work for a former audit client to be extended from two to four years.

The Federal Government has rejected these proposals, characterising Labor’s amendments as prescriptive ‘black letter’ law, in contrast to the Government’s principles-based approach to corporate governance.

The Clerp 9 changes follow the introduction of strict new audit rules for settlement agents’ trust accounts in WA.

From the start of June, auditors must disclose any relationship or business dealings they have with settlement agents.

In general, they will be disqualified from acting as auditor if they also provide tax and other accountancy services to a settlement agent.

Similar rules were introduced for real estate agents’ trust accounts last year.