Additional comments by Hon Alex Hawke MP, Deputy Chair and Senator Paul Scarr

Introduction

1.1The purpose of these additional comments is to detail reservations held in relation to some of the recommendations made in the committee report.

1.2At the outset, it should be noted that we are very supportive of a majority of the recommendations made in the committee report.This is because we agree with the need for greater governance, disclosure and transparency requirements being imposed upon large professional partnerships, including the large multidisciplinary accounting practises, given their significance to the Australian economy.Further, the inquiry has indicated that there needs to be a range of reforms implemented with respect to matters such as: regulatory oversight, disciplinary procedures and the calibration of appropriate penalties for misconduct.Again, we agree with these recommendations.

1.3With respect to the limited number of recommendations where we have reservations, we appreciate the intent.However, in considering the appropriate response to the conduct of PwC (and other issues considered by the inquiry), in our view, care must be taken to implement reforms which are reasonable and proportionate.Ideally, reforms would be staged so that their impact can be assessed prior to additional reforms being implemented.The cost of implementation (for both the public sector and private sector) needs to be balanced against the benefit. Great care is needed to avoid unintended consequences.Throughout the process of implementation, there must be close liaison with impacted stakeholders.

1.4Finally, we thank Senator Deborah O’Neill, Chair of the committee, for her outstanding leadership of this inquiry.The committee has acted in a collegiate way in the best traditions of the Australian parliament.The Chair has been resolute in pursuing the issues falling within the terms of reference of this inquiry.We commend Senator Deborah O’Neill for her leadership, particularly in leading the pursuit of additional evidence from PwC and those previously associated with PwC.We also acknowledge the diligence and contribution of other members of the committee and the secretariat.

1.5We now turn to the recommendations made in the committee report where we have reservations.

Reservations in relation to decrease in cap on the size of partnerships (recommendation 3 in the committee report)

1.6We do not agree with the recommendation that the Australian government reduce the allowable size of partnerships for accountants to a maximum of 400 partners (refer to recommendation 3 of the committee report).

1.7As detailed in the committee report, the Government previously passed laws that increased the cap to 1,000 partners.A cut in the number of partners would cause great disruption to those firms which currently have more than 400 partners.Businesses have been built based on the current cap.Individuals within the firms have no doubt made decisions with respect to their prospects of career progression on the expectation that there was a path to partnership.Any change to the cap would cause great organisational disruption.Is it practical to impose such a material change?How do you cut the number of partners to the extent contemplated by the proposed cap?How is that decision made under a Partnership Deed? Will it lead to litigation?What does it mean for salaried partners?How does it impact the progression of talented staff who are on the partnership track?What workarounds would large partnerships adopt to mitigate the impact of such a change to the cap?

1.8Implementation of the recommendation would represent an extraordinary intervention in the market by the government and cause great disruption to firms who have implemented structures in good faith in the reasonable expectation that the law would not be materially changed after the event.In our view, such an extraordinary intervention would require extremely strong justification, including that there was no alternative way in which to address the issues identified in the committee’s report.We are not satisfied that such justification has been provided.

1.9The recommendation is based on the argument that it is impractical for partners to exercise appropriate oversight where there are just so many partners.However, this is a dynamic which occurs in any large organisation.In our view, the relevant question is what governance structures do the owners of the business (be they partners or shareholders) implement to mitigate the risk.Given that partners have joint and several liability, shouldn’t they be the ones who are most exercised by this issue?

1.10If our views are not accepted in this regard, we strongly recommend that there be detailed consultation with relevant stakeholders (including the firms impacted by such a change) prior to any decrease in the cap.

1.11Finally, we also note that recommendation 19 in the committee report calls upon the government to consider requiring audit firms to incorporate.If large partnerships are to be put through the organisational disruption of going through a material reduction in partners, then this should be an end to the matter – they should not face the additional prospect of potentially being required to incorporate.Moreover, if the other reforms proposed in the committee report are implemented, then whether or not a business is a partnership or a company should be of less concern.

1.12We recommend that the Australian Government not implement a change in the cap on the size of large multidisciplinary accounting firms to 400 partners at this point in time given that firms have been structured in good faith on the basis of the existing law and there are other reforms (governance, disclosure, transparency, regulatory oversight) that may be implemented to address the issues raised during the inquiry. The effectiveness of any such reform should be assessed prior to implementing such a significant change.

1.13If our recommendation 1 is not accepted, we recommend that any proposed change in the cap on the number of partners be the subject of detailed consideration prior to implementation to provide the firms impacted by any such change and other relevant stakeholders with the opportunity to make detailed submissions, including with respect to any unintended consequences arising from such a change in the cap on the number of partners.

Reservations in relation to imposing absolute prohibition on provision of any non-audit services to an audit client (recommendation 8 in the committee report)

1.14We note that recommendation 8 in the committee report proposes an absolute prohibition upon large multidisciplinary accounting firms providing non-audit services to an audit client.In this regard, we note that there are already stringent controls with respect to what non-audit services may be provided to an audit client. There is an absolute prohibition on the provision of some services.With respect to the audit of public interest entities (including listed public companies) there are further prohibitions.In other cases, the relevant codes and standards impose applicable principles which must be adhered to in order to maintain independence and mitigate against conflicts of interest.Refer to APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board.This Code is based on the International Code of Ethics for Professional Accountants.

1.15We also note that the committee report proposes operational separation of the audit and non-audit functions in firms which audit public interest entities. This is based on the operational separation principles applying in the United Kingdom.We support that recommendation.We also note that the United Kingdom does not impose an absolute prohibition upon the provision of non-audit services to audit clients. The Ethical Standard issued by the Financial Reporting Council of the United Kingdom contains principles consistent with those applying in Australian under APES 110. Again, that standard applies rigorous and detailed controls.

1.16In conclusion, in our view, the impact of the reforms proposed in the other recommendations, including with respect to the operational separation of the audit practice, should be assessed prior to implementing an absolute prohibition upon the provision of any non-audit services to audit clients.

1.17Given the other reforms proposed (including the operational separation of audit practices from non-audit practices as per the practice in the United Kingdom) and current regulation of the provision of non-audit services to audit clients, we do not recommend the introduction of an absolute prohibition on the provision of any non-audit services to audit clients.

Reservations in relation to imposition of additional regulatory obligations, including upon mid-size and small partnerships and miscellaneous matters (various recommendations in the committee report)

1.18There are a number of recommendations in the committee report which countenance additional regulatory burdens, including for mid-size firms and potentially smaller firms.In our view, the focus should be on large partnerships; especially those which are conducting audit and assurance work for public interest entities.Care should be taken prior to imposing additional regulatory burdens upon mid-size and small partnerships.Reforms need to be reasonable and proportionate.

1.19We refer to the following:

we have reservations with respect to potentially expanding the governance and accountability requirements imposed upon large partnerships to mid-size partnerships (refer to recommendation 5 of the committee report);

we have reservations with respect to the need to establish an organisation equivalent to the United States Public Company Accounting Oversight Board – any such reform should be preceded by a rigorous holistic review of the entire regulatory framework in this regard (refer to recommendation 20 of the committee report); and

there are recommendations for the Australian Government to lead in the process of establishing a consultancy code and associated compliance body which is not subject to any size based thresholds – we do not consider that the case has been made for those recommendations; especially given that the misconduct which was the particular focus of the committee’s deliberations related to large multi-disciplinary accounting and audit firms (refer to recommendations 29, 30 and 32 of the committee report).

1.20It is recommended that detailed consideration is required prior to imposing the same regulatory burdens imposed upon large multidisciplinary accounting and auditing firms upon mid-size (or smaller) firms or businesses.