Auditors without professional borders

Auditors assure the accuracy of a company's financial records for shareholders, the public and the economy at large. It's a matter of trust.

Yet leaked documents handed to Fairfax Nine by a whistleblower this year, triggered a parliamentary inquiry, (The Regulation of Auditing in Australia), which will hear testimony in 2020, about the cosy relationship between large audit firms and their clients.

The economy relies especially heavily on the exactitude and probity of the 'Big Four' - Deloitte, PwC, EY, and KPMG – as they are the only institutions big enough to audit multinational corporations and government agencies.

The 2011–12 ASIC audit inspection report found that in 18 per cent of sampled key audit areas, Deloitte, EY, KPMG and PwC had failed to obtain "reasonable assurance" that the financial report as a whole was accurate and free of misstatements.

By the time ASIC released its Audit inspection program report for 2016–17, that number had blown out to 25 per cent.

At the same time, large accounting firms are scaling down their auditing functions to focus more on their profitable advisory-based consultancies.

In the last three financial years, audit revenue at Deloitte dropped from 19.2 per cent to 14.7 per cent. At EY, it fell from 28.1 per cent to 21.7 per cent. At KPMG, revenue dropped from 24 per cent to 21 per cent and at PwC, it slumped from 22.5 per cent to 18.7 per cent.

Across Australia, professional services are the fastest growth areas in accounting. The top 100 companies posted a total revenue of $11.25 billion in the last financial year. That's up ten per cent on the previous year.

The Big Four accounting firms accounted for almost 70 per cent or $7.8 billion of that revenue, thanks to the rivers of cash rolling in from their professional service divisions.

Last year, finance journalist Richard Brooks wrote in his book, Bean Counters: The triumph of the accountants and how they broke capitalism, that the main focus of these giant accounting firms was not audits but on providing professional services such as financial and IT systems advice.

"It's not really any longer an accountancy profession," Brooks wrote. "It's more a consultancy profession, or it would call itself professional services, with auditing just one of its business lines, and a minority one at that."

In my old home town of Adelaide, the sheer number of current and past tenders awarded to KPMG, makes one wonder whether KMPG works for the state government or vice a versa.