Chapter 1Introduction
Inquiry commencement and terms of reference
1.1The Parliamentary Joint Committee on Corporations and Financial Services (the committee) is established by Part 14 of the Australian Securities and Investments Commission Act 2001 (ASIC Act).
1.2On 22 June 2023, the committee commenced an inquiry into ethics and professional accountability pursuant to its duties under section 243 of the ASIC Act.
1.3Section 243 of the ASIC Act sets out the committee’s duties as follows:
(a)to inquire into, and report to both Houses on:
(i)activities of ASIC or the Takeovers Panel, or matters connected with such activities, to which, in the Parliamentary Committee’s opinion, the Parliament’s attention should be directed; or
(ii)the operation of the corporations legislation (other than the excluded provisions); or
(iii)the operation of any other law of the Commonwealth, or any law of a State or Territory, that appears to the Parliamentary Committee to affect significantly the operation of the corporations legislation (other than the excluded provisions); or
(iv)the operation of any foreign business law, or any other law of a foreign country, that appears to the Parliamentary Committee to affect significantly the operation of the corporations legislation (other than the excluded provisions); and
(b)to examine each annual report that is prepared by a body established by this Act and of which a copy has been laid before a House, and to report to both Houses on matters that appear in, or arise out of, that annual report and to which, in the Parliamentary Committee’s opinion, the Parliament’s attention should be directed; and
(c)to inquire into any question in connection with its duties that is referred to by a House, and to report to that House on that question.
1.4The terms of reference agreed upon by the committee call for an inquiry into recent allegations of and responses to misconduct in the Australian operations of the major accounting, audit and consultancy firms (including but not exclusive to the ‘Big Four’, PwC, Deloitte, EY and KPMG), via a detailed investigation and analysis of regulatory, technical, and legal settings, and broader cultural factors, including:
(a)the global and national firm structures, including:
(i)the legal basis for partnership, corporate, hybrid and other structures;
(ii)issues arising from cross border structures and operations; and
(iii)the impact of such structures on confidence in the advisory and audit assurance market for regulatory supervision and accountability to public and corporate sector clients;
(b)the extent to which governance obligations applying to a professional services firm may vary depending on the structure adopted, such as a partnership, a company, a trust, or other structure, and consideration of any gaps and international best practice in areas such as:
(i)entity reporting and transparency;
(ii)executive accountability and remuneration;
(iii)fit and proper person requirements;
(iv)the structure of contracts and the fiduciary responsibility to public and corporate sector clients;
(v)prevailing cultural practices;
(vi)consumer and client protection;
(vii)duties of care;
(viii)management of conflicts of interest; and
(ix)access to whistle-blower protections; and
(c)mechanisms available to government departments, statutory authorities, professional standards bodies, regulators and non-government clients and sanction misconduct and poor performance, including any gaps and overlaps across service and entity types for:
(i)accountability frameworks for governance obligations;
(ii)coverage of disciplinary bodies;
(iii)self-reporting policies and practice;
(iv)whistle-blower policies and established pathways to report;
(v) interaction with and self-referral to regulatory bodies;
(vi).interaction between regulatory bodies; and
(vii)competition in the audit market; and
(viii)any other related matters.
Conduct of the inquiry
1.5The committee called for submissions by advertising the inquiry on its webpage and wrote to relevant stakeholders and interested parties inviting written submissions by 31 August 2023. The committee continued to consider submissions and evidence provided after this date.
1.6The committee received 83 submissions as well as supplementary submissions, additional information and answers to questions on notice, which are listed in Appendix 1.
1.7The committee held the following public hearings:
6 October 2023 in Canberra;
3 November 2023 in Melbourne;
20 November 2023 in Canberra;
21 November 2023 in Canberra;
22 February 2024 in Canberra;
29 February 2024 in Canberra;
1 March 2024 in Canberra;
5 March 2024 in Canberra;
22 April 2024 in Canberra;
8 May 2024 in Sydney;
2 August 2024 in Canberra; and
20 September 2024 in Canberra.
1.8A list of witnesses who gave evidence at the public hearings can be found in Appendix 2.
Reason for the inquiry and structure of the report
1.9This inquiry was triggered by the PwC breach of confidentiality obligations (see Chapter 2). That incident identified serious regulatory, governance and accountability issues in PwC, one of the Big Four global interdisciplinary firms that provide a range of services to the public and private sectors.
1.10However, other serious incidents and inherent conflicts of interest at the other Big Four firms, namely Deloitte, EY, and KPMG, added impetus to the inquiry.
1.11Therefore, the committee took the opportunity to look more broadly at the services that the Big Four multidisciplinary partnerships provide, particularly in audit, assurance and consulting, and the overall legislative and regulatory framework within which they operate.
1.12This inquiry discusses matters of governance, professional standards, ethics, accountability, whistleblower protections, and structure in these large multidisciplinary partnerships, as well as competition in the audit sector.
1.13The report is structured as follows:
Chapter 3: structural and governance challenges in the Big Four firms, including:
- the impact of large partnership structures on effective governance and possible alternative approaches; and
- the impact of multidisciplinary firm structures on conflicts of interest between the provision of audit and non-audit services.
Chapter 4: progress on implementing the committee’s recommendations following its previous inquiry into the regulation of auditing and new evidence received in this inquiry.
Chapter 5: rationalising the regulators for audit and accounting.
Chapter 6: professional bodies and standards including:
- oversight of the professional accounting bodies;
- legislative backing for professional and ethical standards; and
- the lack of professional bodies and standards for consultants.
Chapter 7: protection of whistleblowers.
Chapter 8: competition in the audit sector.
The recommendations made by the Committee have been put into two categories which reflects their respective importance.The priority recommendations (1 to 12, 18, 19, 22, and 29) are those which the Committee considers are of key importance for immediate action.The other recommendations are matters which should be the subject of government consideration and action.
Acknowledgements
1.14The committee thanks all individuals and organisations who contributed to this inquiry by preparing written submissions and giving evidence at the public hearings.