Chapter 6Professional bodies and standards
Introduction
6.1The industry self-regulatory bodies for the accounting profession in Australia include the three professional accounting bodies (PABs), namely Certified Practicing Accountants Australia (CPA Australia), Chartered Accountants Australia and New Zealand (CAANZ) and the Institute of Public Accountants (IPA).
6.2The PABs are intended to function in the public interest by maintaining and monitoring a range of professional competency standards and conducting quality reviews.
6.3However, evidence to this inquiry revealed several concerning failures in relation to the PABs’ oversight of the PwC breach of confidentiality obligations.
6.4For example, CAANZ did not take disciplinary action against one of the PwC partners at the centre of the PwC breach of confidentiality obligations in part because the partner resigned from CAANZ, when he should not have been able to do so. Further, the Tax Practitioners Board (TPB) was not aware that the partner was a member of CAANZ and therefore did not notify CAANZ.
6.5It is unclear whether PwC informed CAANZ about the partner’s role in the PwC breach of confidentiality obligations and subsequent legal professional privilege issues.
6.6Even when CAANZ did act, the maximum fine that CAANZ could impose on PwC at the time was $50000 which is unlikely to have been a significant deterrent considering that PwC is a large and profitable firm. The maximum allowable fine was subsequently increased by a factor of five.
6.7This chapter is split into two broad parts. The first part sets out the role of the three professional accounting bodies and the professional standards schemes. It then considers the functions of the PABs and options to improve the oversight processes, including whether legislative backing is required for ethical standards. Next, evidence on a gap in code coverage for the accounting profession is presented. The first part concludes with the committee’s views and recommendations on these matters.
6.8The second part explores the regulation, professional standards and ethical code for consultants.
Role of the professional accounting bodies in Australia
6.9The PABs maintain and monitor their members’ professional competence and standards through eligibility requirements for their membership, provide their members with ongoing training, guidance, and tools, require continuous professional development, and conduct quality reviews of individual members and firms.
6.10As members of the International Federation of Accountants, the PABs are required to comply with membership obligations such as benchmarks and core competencies and ‘plan and perform quality assurance reviews of firms and individual members (including auditors) and take appropriate corrective action for non-compliance’.
Professional standards schemes
6.11The PABs administer the professional standards schemes for accountants in Australia under the state and territory professional standards councils enabled by professional standards legislation.
6.12The Professional Standards Councils’ submission explained that a professional standards scheme is ‘a statutory instrument underpinned by an occupational association’s commitments to monitor, enforce, and improve the professional standards of its members’.
6.13The Professional Standards Councils submitted that the professional standards system is effective because professional associations and their members share in the regulation of their professions, creating a culture of peer-driven continuous improvement. Additionally, their specific regulatory functions complement regulation of the professions by other state entities.
6.14The PABs must submit a professional standards report to the Professional Standards Councils by 31 March each year. The reports are required to cover decisions, policies and actions on a range of matters including informing members and consumers, protecting consumers, responding to consumer complaints and claims, and scheme administration.
6.15The PAB reports to the Professional Standards Councils are not publicly available.
APESB and APES 110
6.16The PABs established and funded the Accounting Professional and Ethical Standards Board (APESB), an independent national body, to set the code of ethics (APES 110). APES 110 imposes professional obligations and ethical requirements on members of the accounting profession based on five fundamental principles of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.
6.17APES 110 is based on the international code of ethics for professional accountants issued by the International Ethics Standards Board for Accountants (IESBA). PAB members must comply with the APES110 code under the PAB by-laws and associated disciplinary frameworks.
6.18The APES 110 code is a mandatory requirement with the force of law for audits and reviews of entities subject to the Corporations Act 2001. Currently, only the APES 110 code has legislative backing provided by a legislative instrument.
Functions of the PABs and options to improve the oversight processes
6.19The Financial Review Council (FRC)’s 2023 review of the oversight of audit quality in Australia considered several matters related to the roles and functions of the PABs.
6.20The FRC noted that because each PAB has its own separate investigatory and disciplinary function, a conflict of interest arises because the PABs receive fees from members and represent their members interests, and at the same time must manage the conduct of their members.
6.21Therefore, the FRC recommended that the government review the Companies Auditors Disciplinary Board, the Australian Securities and Investments Commission (ASIC) and the PABs’ investigatory and disciplinary processes, including whether these functions should be performed by a single independent body.
6.22The FRC also suggested the government consider whether ethical standards should be set by an independent statutory body to ‘help address any perceived conflict of interest’, and whether ASIC was the most appropriate body to undertake the enforcement role.
6.23The FRC also recommended the government consider giving legislative backing to requirements for auditors to comply with ethical standards and enforcement of compliance.
6.24The IPA noted that an alternative approach would be to give legislative force to codes of conduct applicable to members of the PABs, which could be achieved by requiring the PABs to report directly to the FRC. Further:
…the existing FRC regulatory framework could be expanded to include oversight of the professional accounting bodies, which would strengthen and improve the co-regulatory function which the accounting bodies currently undertake. This framework could be streamlined if the existing functions of the APESB (which do not have the force of law) were absorbed into the FRC.
6.25This proposal was supported by the APESB, FRC and other submitters.
6.26The IPA noted that the investigative and disciplinary functions of the professional bodies are limited. In requiring the PABs to report directly to the FRC, the IPA considered that the FRC would require various powers including ‘a power to sanction non-compliance with information gathering requests’ and the ability to delegate complaint handling to the PABs.
Gaps in code coverage for accounting and internal audit
6.27The committee received evidence that significant gaps exist around the professional licensing requirements for accountants and internal auditors.
6.28For example, CAANZ noted that there is no regulatory requirement for professionals who offer general accounting services to be licensed or to be a member of a PAB.
6.29The IPA submitted there are:
…thousands of people who can legally call themselves ‘accountant’ and provide numerous services to the public, without being subject to any accountability framework or governance requirements.
6.30To improve consumer protection, accountability, and regulatory efficiency, the IPA proposed legally defining the term ‘accountant’.
6.31Likewise, the Institute of Internal Auditors noted that not all internal auditors are covered by professional memberships, and suggested ‘mandating professional membership requirements for all internal audit consultants’ to strengthen governance within firms.
Parliamentary scrutiny of bodies administering professional standards schemes
6.32In its June 2024 report on its inquiry the management and assurance of integrity by consulting services, the Senate Finance and Public Administration References Committee (F&PA committee) concluded that improved oversight and regulation of self-regulatory structures and bodies like the PABs is required to ensure the integrity of consulting services procured by government.
6.33Accordingly, the F&PA committee recommended greater parliamentary scrutiny of the bodies administering professional standards schemes by recommending that the government:
require those organisations that operate professional standards as self-regulatory regimes, to report annually on the operation of those standards to the Joint Standing Committee on Corporations and Financial Services; and
require these same organisations to appear before that committee to provide oversight on the operation of the relevant standard.
Committee view
Parliamentary scrutiny of bodies administering professional standards schemes
6.34The committee supports the F&PA committee’s recommendation for greater parliamentary scrutiny of the bodies administering professional standards schemes, noting the shortcomings of such bodies in relation to the PwC breach of confidentiality obligations.
6.35In August 2024, the committee therefore determined that it would commence annual oversight of CAANZ, CPA Australia and the IPA in accordance with its statutory functions under subsection 243(a) of the Australian Securities and Investments Commission Act 2001.
Publication of PAB reports on their professional standards schemes
6.36The committee is concerned that the PAB reports on their professional standards schemes to the professional standards councils are not publicly available. As a result, there is a lack of accountability on the operation of the PAB professional standards schemes. Hence, the committee recommends that the PAB reports to the professional standards councils are published on the PAB websites.
6.37The committee recommends that the professional accounting bodies’ reports to the Professional Standards Councils are published on the professional accounting bodies’ websites.
Single independent body for investigatory and disciplinary functions
6.38The committee concurs with the view of several submitters that there is a potential conflict of interest between the role of the PABs in managing the conduct of their members and their role in representing the interests of members. The committee therefore considers that the government should review the PABs’ investigatory and disciplinary processes and consider the establishment of a single, independent body to perform these functions.
6.39The committee recommends that the Australian Government review the professional accounting bodies’ investigatory and disciplinary processes and, if appropriate, establish a single, independent body to perform these functions. Such a body should incorporate a positive disclosure standard so that relevant entities would be required to disclose incidents that are flagged to the Australian Securities and Investments Commission and the new integrated Financial Reporting Council.
Legislation to make the term ‘accountant’ a protected term
6.40The committee is concerned by the evidence from the IPA that persons with no statutory registration can legally call themselves accountants and provide numerous services to the public without being subject to any accountability framework or governance requirements.
6.41The committee therefore suggests that the government define the term ‘accountant’ at law.
6.42The committee recommends that the Australian Government bring forward legislation to make the term ‘accountant’ a protected term, so that only qualified accountants who are members of a professional body can use it.
Integration of the APESB into the new FRC
6.43The committee agrees with the evidence received that there would be advantages in giving the APESB standards legislative backing and moving the APESB into the new FRC. This would be more consistent with relevant overseas jurisdictions. The committee suggests the government’s implementation of the proposal to integrate the FRC, the Australian Accounting Standards Board, and the Auditing and Assurance Standards Board (AUASB) would also provide an opportunity to integrate the APESB into the new FRC and give legislative backing to the standards.
6.44The committee recommends that the Australian Government, as part of establishing the new integrated Financial Reporting Council (FRC), consider how ethical standards and professional matters are to be treated (including the FRC’s role in creating standards, and the role of the Accounting Professional and Ethics Standards Board). Appropriate measures should be adopted to address the conflict of interest inherent in professional bodies setting and enforcing their own standards whilst overseeing entities who are their own fee-paying members.
Regulation, professional standards, and code of ethics for consultants
6.45The Big Four firms advised that, to provide consulting services, their firms draw on a network of specialists in economics, financial instrument valuation, assurance, taxation, security, commercial strategy and emerging professions such as climate transition, information technology, data science, and cyber security.
6.46However, several submitters noted that the multidisciplinary nature of the Big Four firms means that the professional and ethical standards and obligations that apply to some staff and managers based on their profession (for example, auditing, tax, insolvency, law and financial advice) do not apply to other staff and managers, such as consultants.
6.47Further, the committee was warned that consultants may operate with a very different logic to the professions which are required under their relevant codes of ethics to act in the public interest. Therefore, any public sector agency needs to clearly recognise that when they engage consultants, they are dealing with market actors that are not required to have any regard for the interests of their client or the public interest but may merely be interested in satisfying their own commercial self-interest.
6.48Accordingly, several submitters and market participants called for a range of measures including coverage of consultants by professional and ethical codes and an independent oversight body to regulate the industry.
6.49The remainder of this chapter looks at the lack of regulatory coverage of consulting services, the lack of professional standards for consultants, and the inherent conflicts of interest faced by consultants in the Big Four firms. It then considers the options for reform and finishes with the committee views and recommendations.
Lack of regulatory coverage of consulting services
6.50BDO commented that the rise of consulting has created a gap in regulatory oversight. While audit, tax and financial advisory services are regulated, the regulation of advisers and services outside these classifications, such as management consultants, cyber security advisers and risk managers, is less clear or ambiguous.
6.51Treasury noted that there is no single standard definition of ‘consulting’. Accordingly, ‘the incentive that drives firms in this sector to perform to a satisfactory level is the firm-client relationship’, typically managed by the contractual arrangement. Apart from consultants who are legal practitioners, or certain consulting services that may, for example, require an Australian financial services licence, there is no specific regulation that covers consultancy services.
Lack of professional standards for consultants
6.52Just as there is no specific regulation of consultants, there are no common professional requirements or attendant code of ethics.
6.53The Australian Council of Professions defines a profession:
A Profession is a disciplined group of individuals who adhere to ethical standards and who hold themselves out as, and are accepted by the public as, possessing special knowledge and skills in a widely recognised body of learning derived from research, education and training at a high level, and who are prepared to apply this knowledge and exercise these skills in the interest of others.
6.54Importantly, each profession has a recognised code of ethics that governs the behaviour and activities of its members:
It is inherent in the definition of a Profession that a code of ethics governs the activities of each Profession. Such codes require behaviour and practice beyond the personal moral obligations of an individual. They define and demand high standards of behaviour in respect to the services provided to the public and in dealing with professional colleagues. Often these codes are enforced by the Profession and are acknowledged and accepted by the community.
6.55The IPA submitted that, even though the Institute of Management Consultants has developed an ethical code, ‘consultants are generally not required to be members and so are largely not subject to any ethical standards’.
6.56The IPA noted that:
This position is understandable from a historical perspective given that consultants do not present themselves as having particular qualifications and are engaged by a generally sophisticated client base to perform a diverse range of work, to which a single ethical code would not necessarily be appropriate. Clients are free to engage consultants on the contractual terms that are agreed, including terms relating to probity.
6.57However, the IPA also recognised that ‘recent issues demonstrate how the reliance upon consultants by the Australian public and private sectors is such that the public interest requires consultants to be subject to stricter standards’.
6.58The Ethics Centre was concerned that consultants in the Big Four firms do not belong to a genuine profession subject to mandatory ethical standards. The Ethics Centre recognised that it would take time for consultancy to become a true profession and, in the meantime, it may be necessary for consultants ‘to be controlled by members of another profession’ such as accountants and auditors.
Conflicts of interest faced by consultants in the Big Four firms
6.59Professor Peter Wells submitted that conflicts of interests arise for consultants in the Big Four firms because of ‘the diverse nature of the relations between the clients of the large accounting firms’.
6.60These conflicts of interest are difficult to address when consultants concurrently provide policy and legislative advice to the public sector and advice to private sector clients on compliance with the legislation. Professor Wells characterised these conflicts as ‘poacher and gamekeeper’ conflicts. Because of the inherent nature of the conflicts, he argued that consultants cannot do both.
6.61Dr Simon Longstaff from the Ethics Centre explained that the conflicts of interest have resulted from the balance of power in the Big Four firms shifting away from the original regulated professions with ‘very high professional commitments’ to consultants ‘who may not be bound by any of those professional obligations’. This shift in the Big Four firms has occurred as the share of revenue derived from consulting has grown.
Current professional codes in the Big Four firms
6.62Given the nature of the observations and critiques put forward by some submitters, the Big Four firms provided information on the professional codes and internal policies that apply to their staff:
Deloitte advised that all its staff, regardless of their discipline, are required to comply with Deloitte Australia policies, which incorporate requirements of APES 110. In addition, all its partners are CAANZ members and must therefore comply with APES 110.
EY advised that it ‘adheres to the EY Global Code of Conduct which provides a clear set of ethical business conduct standards that build upon our purpose, values and culture to provide the ethical and behavioural framework on which we provide services to our clients and base our decisions every day’.
KPMG advised that it has a global code of conduct setting out the individual and collective responsibilities all KPMG people have to their peers, clients, and the public.
PwC noted that all PwC partners are members of CAANZ and must therefore comply with APESB standards.
6.63The APESB noted that its pronouncements such as APES 110 apply to all services, including consulting services, provided by members of the PABs, regardless of the services they provide. APESB suggested specifying that APES110 applies to consulting in areas such as information technology, management, strategy, marketing and human resources.
Options for reform
6.64The AUASB provided a substantial list of matters that government should consider in forming a policy position on the regulation of consultants, foremost amongst them clarity on what constitutes consulting services as well as a clear definition of the objectives of regulation, which would determine its nature and scope.
6.65The proposed approaches for regulating consultants generally fell into four categories, which are not mutually exclusive:
establishing an independent regulator for consultants;
establishing an overarching governance framework;
using Commonwealth procurement processes to impose professional and ethical standards; and
implementing a global professional code of ethics.
Establishing an independent regulator for consulting
6.66Several submitters proposed an independent regulator to oversee the audit, assurance and consultancy industry.
6.67The APESB supported the establishment of an independent body to ‘monitor all professional services firms that provide audit, assurance and consulting services’. The APESB noted that the new body would need to take enforcement actions and report annually on its monitoring and enforcement activities.
6.68EY was firmly of the view that its own policies and the overall regulatory environment provided sufficient protection for its clients. However, EY also considered that the fragmentation of oversight functions justified establishing a single Commonwealth regulator ‘to oversee and coordinate the regulatory framework for partnerships and indeed all professional services providers, regardless of their structures’. EY also called for the development of a partnership disciplinary board.
6.69Dr Andy Schmulow favoured establishing an independent regulator for consulting services to government to monitor conflicts of interest and take appropriate enforcement action.
6.70BDO suggested the establishment of an independent oversight body with the following features:
Professional industry bodies would be required to register with this oversight body so that their members are registered.
Consultants to the public sector would be required to register with this indirectly through their membership of a registered professional body or directly if they are not members of a professional body.
All consultants would be required to adhere to standards that govern their conduct.
The body would monitor the conduct of registered consultants and take enforcement action when misconduct is identified.
The oversight body should report annually, providing details on its monitoring and enforcement activities.
6.71While not calling for a single regulator as such, Deloitte recommended the establishment of an ‘independent oversight body for misconduct reporting’ along with:
harmonising the fit and proper person requirements of CAANZ and the various bodies that license disciplines such as audit, insolvency, tax and legal practitioners;
a framework for reporting different types and severity of misconduct; and
guidance for when individual misconduct should also be considered a reportable event by a firm.
6.72Boston Consulting Group submitted that it ‘would welcome the establishment of a formal Australian Government process for reviewing breaches of integrity, contracts or other ethical standards’, with ‘the explicit ability to ban or bar consultants’ from some or all engagements for breaches.
Establishing an overarching governance framework
6.73Several submitters supported an overarching governance framework that would apply generally to the audit, assurance and consultancy industry. Deloitte, for example, submitted:
The development of such a framework will address any gaps in regulatory oversight, reduce duplication, ensure greater alignment and consistency between regulatory and professional associations, and consider matters of structure, governance, accountability and transparency to uniformly strengthen the system.
6.74The joint submission from the Tax Justice Network, Tax Justice Network Australia and the Centre for International Corporate Tax Accountability and Research stated:
It would be desirable for government to embark upon a reform to cover all financial service professionals under the one overarching regulatory framework. An example of an Australian framework to cover professionals in a single industry is the Australian Health Practitioner Regulation Agency. The principles for a regulatory system for financial services professionals would be to ensure that:
the financial service industry serves the public interest;
the regulation of financial service professionals is efficient; and,
the financial services regulatory system promotes high standards by the professionals involved.
Using Commonwealth procurement to impose and enforce ethical standards
6.75Several professional bodies such as the IPA suggested that ‘it may be more expedient to strengthen the government procurement processes rather than to try and regulate such a diverse group of consultants’.
6.76Similarly, CAANZ noted that gaps in the governance of consulting could be addressed by public sector procurement practices.
6.77The Institute of Internal Auditors (IIA) recommended that governments require all contractors undertaking internal audit work for public sector agencies to be members of a professional association and therefore be bound by professional standards and an associated code of ethics. The IIA also recommended a mandatory governance reporting framework for professional services firms who contract to government.
Implementing a global professional code of ethics
6.78The APESB suggested that the government adopt a global code of ethics at least as demanding as APES 110 that would apply to the audit, assurance and consultancy industry, as well as persons that contract with or provide any form of professional services to the government.
6.79As an example, the APESB pointed to IESBA’s development of professional-agnostic Independence Standards for Sustainability Assurance that could ‘be applied regardless of whether professional accountants or other professionals conduct the assurance engagement’. APESB therefore suggested that ‘this approach could be considered [in Australia] to develop a professional-agnostic APES 110 that could apply to all professionals based on the services they provide’.
Committee view
6.80Evidence to the inquiry revealed a marked absence of professional and ethical standards that apply to the work of consultants in Australia. Consultants are only subject to existing professional ethical requirements in limited instances, such as when a member of a professional accounting body, who is subject to the APES 110 code, performs consulting work.
6.81This inconsistent regulation means that many consultants are unconstrained ‘market actors’ behaving in their own commercial self-interest.
6.82The committee notes that the Big Four firms draw on a network of specialists in economics, financial instrument valuation, assurance, taxation, security, commercial strategy and emerging professions such as climate transition, information technology, data science, and cyber security.
6.83The committee considers that, regardless of the nature of the professional services being performed, all consultants should be subject to professional ethical standards equivalent to APES 110 to ensure that their services are provided in the public interest.
6.84The committee acknowledges the benefits that may accrue from the four general and non-exclusive options for reform. However, the development and implementation of such proposals would be complex and require more detailed consultation and consideration than provided for in the context of this inquiry.
6.85That being acknowledged, one option could clearly be implemented with immediate and potentially profound effect. The government could use the Commonwealth procurement process to impose professional and ethical standards on all consultants and firms providing consultancy services to the public sector and use its position as a significant buyer in the market to promote better governance.
6.86Additionally, the committee considers the government should implement a consultancy code of professional and ethical conduct (consultancy code) based on the APES 110 code, supported by the establishment of a consultancy industry membership body to oversee the code, including in relation to enforcement and the conduct of disciplinary processes.
6.87However, noting the current patchwork nature of the audit, assurance and consultancy industry in Australia, the committee recognises the potential overlap in application of the consultancy code and the operation of the associated consultancy industry body with existing professional requirements and industry and professional bodies.
6.88Therefore, the consulting code and associated body should apply narrowly as last resort measures, such that consultants are only subject to the consultancy code and required to join the associated body if not already subject to mandatory professional ethical obligations.
6.89The committee also considers that transparency in the operation of the new consulting body and code is important. The committee notes that the register of banned financial advisors has been very useful and suggests that a similar approach be taken for consultants.
6.90The committee notes that for the register to be effective, there must be appropriate information transfer between regulators and professional bodies. Therefore, the committee recommends that the government and professional bodies develop mechanisms to enhance the transfer of misconduct information between regulators and professional bodies. The Government should consider inclusion of the following features in the consultancy code compliance body:
It should apply to persons providing consultancy services not already subject to other mandatory professional ethical obligations and include an overarching registration for firms themselves.
Government agencies should be required to only engage consultancies who are members of this body.
The registration fees should not create a financial burden for firms.
Membership requirements of the body include mandatory reporting of misconduct witnessed by other consultants.
Once an individual reaches a certain number of complaints, they may be subject to investigation, sanction and potential exclusion from the membership body.
If there are a certain number of reported cases of misconduct against members of a single firm, it should trigger a probation, then a show cause mechanism, which may result in the firm losing its overarching consulting license.
Junior consultants may not require individual registrations (they can work under the supervision of a registered consultant), but if such individuals are found to have engaged in misconduct the license/registration holder is liable for this misconduct.
The disciplinary board should contain no more than 25 per cent of former staff of large consulting firms (firms of over 3000 employees).
Every six months the registration body should publish a report totalling the number of substantiated complaints against individuals within large firms, as well as any ‘probation’ or ‘show cause’ action against firms themselves.
The entity should be reviewed after 3 years after its establishment and consideration be given to the adequacy of its remit and actions.
6.91The committee recommends that the Australian Government consult with industry with a view to creating a consultancy code and associated consultancy code compliance body (with sufficient powers to ensure compliance with the code) within government that will register individual consultants and have graduated registration requirements for firms based on firm size. Government entities, including Corporate Commonwealth Entities, should be required to only engage consultancies who are members of this body. At a minimum the body should apply to persons providing consultancy services not subject to other mandatory obligations and membership requirements should include mandatory reporting of misconduct witnessed by other consultants. This should be reviewed three years after implementation.
Recommendation 30
6.92The committee recommends that the Australian Government consider the creation of a voluntary industry code for public interest entities’ engagement of consultancies, which includes the exclusive use of consultants subject to the code and/or registration body determined in recommendation 29. After three years, the government should review the capacity and effectiveness of the code becoming mandatory for public interest entities.
6.93The committee recommends that consulting firms undertaking government work be required to make a declaration if subject to supervised remediation whilst undertaking government work, and the exact terms of such supervised remediation. Upon tendering for government work, consulting firms should also be required to provide specific information regarding the engagement of the firm with global leadership, including but not limited to the provision of information regarding what oversight, if any, exists with respect to that firm’s engagement with Australian regulatory and legal bodies.
6.94The committee recommends that the Australian Government explore options to enhance accountability for consultants, potentially including the establishment of a public register (maintained by the relevant registration body) to record for public view all instances of malpractice.
6.95The committee recommends that the Australian Government and professional bodies develop mechanisms to enhance the transfer of misconduct information between regulators and all relevant professional bodies.
6.96The committee recommends that the Department of Finance consider further mechanisms to increase usage of small and medium-sized consulting firms in government procurement, including firms which exclusively undertake government work.
6.97The Committee recommends that the Australia Government consider options to improve the Australian Taxation Office’s tax settlement procedures with a view to making their details more transparent to all taxpayers and setting out appropriate procedures and protocols for their use, negotiation and terms.